Bear Stearns came out Thursday and, as expected, posted the first quarterly loss in its history. The firm reported a net loss of $854m, after writing down $1.9bn in mortgage inventory assets net of hedges.
Below is an edited version of the firm's press release.
NEW YORK, NY • December 20, 2007 •
The Bear Stearns Companies Inc. (NYSE:BSC) reported results today for the fiscal year and the fourth quarter ended November 30, 2007. For the fiscal year the company reported $1.52 earnings per share (diluted), compared with $14.27 for fiscal 2006. Net income for the fiscal year was $233 million compared with $2.1 billion earned in fiscal year ended November 30, 2006. Net revenues for the 2007 fiscal year were $5.9 billion, compared with $9.2 billion in the prior fiscal year. The after-tax return on common stockholders' equity was 1.8% for fiscal 2007.
In early November the company announced that it anticipated write-downs of approximately $1.2 billion in mortgage inventory net of hedges. At November 30, total net inventory write-downs were $1.9 billion. These write-downs served to reduce fourth quarter earnings per share (diluted) by $8.21. Including these write-downs the company reported a loss for the fourth quarter ended November 30, 2007 of $6.90 per share1. For the comparable fourth quarter of 2006, the company reported earnings per share (diluted) of $4.00. The net loss for the fourth quarter of 2007 was $854 million as compared with net income of $563 million for the fourth quarter of 2006. Net revenues for the 2007 fourth quarter were a loss of $379 million down from revenues of $2.4 billion for the 2006 fourth quarter.
"We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses," said James E. Cayne, chairman and chief executive officer. "Our underlying fixed income franchise remains strong and we have taken steps to size the division to market conditions. We are taking appropriate measures to position Bear Stearns for renewed profitability in 2008 by focusing our resources on the businesses with growth potential in the current environment, while streamlining our operations in areas with lower expected activity levels. We are confident that these efforts will ensure Bear Stearns remains a strong and profitable competitor in the global marketplace in the years to come."
"When Bear Stearns became a public company, consistent with our entrepreneurial roots and to ensure alignment of interests between management and shareholders, we designed our executive compensation programs to pay for performance. In a year in which we produced unacceptable results, the plans are working as they were designed -- and the members of the executive committee will not receive any bonuses for 2007."
A brief discussion of the firm's business segments follows:
Net revenues in Capital Markets, which includes Institutional Equities, Fixed Income and Investment Banking, were a loss of $956 million in the fourth quarter of 2007, down from net revenues of $1.9 billion in the fourth quarter ended November 30, 2006.
- Institutional Equities net revenues were $384 million, down 11% from $430 million in the fourth quarter of 2006. Record results from international equity sales and trading and continued strong results from domestic equity sales drove this quarterly performance partially offset by reduced performance in structured equity products.
- Fixed Income net revenues were a loss of $1.5 billion, down from net revenues of $1.1 billion in the fourth quarter of 2006. The continued re-pricing of credit risk and the severe dislocation in the structured products market led to illiquidity in the fixed income markets, lower levels of client activity across the fixed income sector and a significant revaluation of mortgage inventory. Total write-downs were $1.9 billion in the quarter net of hedges.
- Investment Banking net revenues were $205 million in the fourth quarter of 2007, down 44% from the $364 million in the comparable prior-year period. This decrease reflects lower fees from fixed income underwriting which were partially offset by continued strong merger and acquisition activity levels.
Capital Markets net revenues were $3.9 billion in fiscal year 2007, a decrease of 46% from the $7.3 billion reported in 2006.
- Institutional Equities net revenues in the 2007 fiscal year were up 10% to a record $2.2 billion from $2.0 billion in fiscal 2006. International sales and trading, risk arbitrage and principal strategies all delivered record results.
- Fixed Income net revenues were $685 million in 2007, down from $4.2 billion in 2006. Results for 2007 were heavily influenced by the severe market conditions across the fixed income sector. More broadly, the re-pricing of credit also led to significantly lower net revenue levels due to illiquidity in the markets as trading activity levels deteriorated across the spectrum of fixed income products.
- Investment Banking reported net revenues of $1.1 billion in fiscal 2007, down 8% from $1.2 billion in the prior fiscal year. Increases in equity underwriting and higher transaction volumes in advisory areas were more than offset by lower fixed income underwriting net revenues and merchant banking results.
GLOBAL CLEARING SERVICES
Fourth quarter 2007 Global Clearing Services net revenues were $276 million, up 2% from $271 million in the fourth quarter of 2006. Net interest revenues increased due to higher margin debt balances. Average customer margin debt balances for the quarter ended November 30, 2007 were $82.1 billion, up from $72.0 billion in the prior year quarter. Customer short balances averaged $84.6 billion during the fourth quarter of 2007, down from the prior year fourth quarter average of $90.0 billion.
Net revenues for the 2007 fiscal year in Global Clearing Services were a record $1.2 billion, up 11% from $1.1 billion in fiscal 2006. Net interest revenues increased due to higher average customer margin debt and average customer short balances. Average customer margin debt balances in 2007 were $90.3 billion compared with $68.4 billion in the fiscal year ended November 30, 2006. Customer short balances averaged $95.6 billion during the 2007 fiscal year, up from the average of $82.6 billion for the 2006 fiscal year.
Wealth Management net revenues were $272 million in the fourth quarter of 2007, up 10% from $247 million in the fourth quarter of 2006.
- Private Client Services net revenues were a record $161 million in the fourth quarter of 2007, an increase of 20% from $134 million in the 2006 quarter. Increased equity in client accounts, higher client activity levels and the continued growth in fee-based assets drove the quarterly revenue increase.
- Asset Management net revenues were $111 million for the fourth quarter of 2007 down slightly from $113 million in the prior year quarter. Performance and management fees increased compared with the year ago period but were offset by reduced principal gains.
Wealth Management net revenues were $830 million in fiscal 2007, a decrease of 3% compared with $858 million in fiscal 2006.
- Net revenues from Private Client Services rose 15% to a record $602 million for the 2007 fiscal year from $522 million for fiscal 2006. Higher performance and management fees due to strong performance and higher levels of fee-based assets drove record results.
- Asset Management reported net revenues of $228 million in the 2007 fiscal year, down 32% from $336 million in the prior year. The decline resulted from write-offs associated with receivables from and investments in the hedge funds, and lower management fees related to proprietary hedge fund products. Assets under management decreased due to a transfer of assets to a newly formed minority-owned affiliated asset manager and reductions in alternative assets under management. As of November 30, 2007 assets under management decreased to $44.6 billion from $52.5 billion as of November 30, 2006.
- Compensation expenses were $326 million in the quarter ended November 30, 2007, down 69% from $1.1 billion in the 2006 quarter.
- Non-compensation expenses were $666 million in the 2007 quarter, up 42% from $468 million in the 2006 quarter. The increase is related to severance and legal expense as well as higher occupancy fees, professional fees, and communications and technology costs.
- In the fiscal year ended November 30, 2007, compensation as a percentage of net revenues was 57.6% as compared with 47.1% for the 2006 fiscal year.
- Non-compensation expenses for the fiscal year 2007 were $2.3 billion, 34% higher than the $1.7 billion reported in 2006. Expenses rose due to higher occupancy expenses, professional fees, and communications and technology costs associated with increased headcount as well as a write-down of intangible assets, representing goodwill and specialist rights of Bear Wagner Specialists and severance charges included in other expenses.
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