Low Investment Banking Earnings: Bear Stearns has been lagging behind its competitors in global equity underwriting market share and has recorded high volatility in global mergers and acquisitions. As a result, the Investment Banking sub-segment presents a risk to the contribution of Capital Markets to Bear Stearns’ total net revenue.
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Decline in Mortgage Origination: Potential future declines in the mortgage originations market could dictate losses in the Fixed Income sub-segment, a significant position of which has been dedicated to mortgage related banking.
Anyone who follows the financial news has certainly been hearing a great deal about Bear Stearns recently. The collapse of the subprime lending industry has impacted financial services firms throughout the economy. Of all the major investment banks, however, Bear Stearns dove into the subprime lending and mortgage-backed securities markets particularly heartily. As such, the sharp rise in the number of mortgage defaults has hit Bear much more than most of its competitors. It's estimated that Bear Stearns alone had issued 10.3% of all mortgage-backed securities by the end of 2006, before the unraveling of the subprime industry. Since the beginning 2007, Bear Stearns has hemorrhaged over $3.4 billion as a result of the subprime bust. It declared two of its hedge funds essentially worthless in mid-July, citing their substantial investments in subprime mortgage-backed securities as reasons for the loss of hundreds of millions of dollars. The company is now facing a lawsuit from investors, who are claiming mismanagement and misrepresentation of the risks on Bear's part. On August 1, Bear announced that it had suspended withdrawals from yet another of its hedge funds, meaning that investors cannot take their money and leave. Though it's estimated that around 0.5% of this fund's investments are tied to subprime mortgages, this is nonetheless a sign of trouble (withdrawals were suspended from the other two funds before they collapsed). On top of all of this, Bear Stearns is concentrated heavily in the U.S., with only 13% of 2006 revenues coming from international sources. A continuation in the subprime collapse will likely drag the U.S. economy down with it, which is bad news for Bear.
Current International Sales: Although the current European fixed income market provides Bear Stearns with future investment opportunities, Bear Stearns internationally generated revenue lags way behind its major competitors. This places a high opportunity cost on Bear Stearns current meager sale of services internationally.