[NYTr] Crashing Economy: US Banks as Basement Bargains

[All the News That Doesn't Fit]

[Morgan Stanley announced yesterday that they're hurtin' so bad they
have sold a bunch of their stock to Chinese investors to get $5
billion dollars. They've posted the first quarterly loss in their
72-year history -- a whopping $9.4 Billion. See 4th story below for a
reaction from Philip Bowring. Members of the Investor Class must be
having serious nightmares for the first time since the Great
Depression. -NY Transfer]


The York Times -Dec 20, 2007
http://www.nytimes.com/2007/12/20/business/20wall.html

$9.4 Billion Write-Down at Morgan Stanley

By LANDON THOMAS Jr.

Morgan Stanley reported the first quarterly loss in its 72-year history
Wednesday, heightening fears that the financial toll would keep
mounting from the fast-spreading crisis in the subprime mortgage market.

The company took a $9.4 billion charge on subprime-linked investments
for the fourth quarter, bringing its cumulative charges for subprime
mortgages to $10.8 billion. In a stark reflection of its diminished
status it also said it would sell a $5 billion stake to a Chinese
investment fund to shore up its capital.

Wall Street banks so far have reported more than $40 billion of losses
as a result of the crisis in the mortgage market. Worst-case estimates
put the eventual bill at $200 billion or more. The tally is likely to
rise again Thursday when Bear Stearns is expected to report a quarterly
loss.

The developments on Wednesday were a stunning turn of events for Morgan
Stanley, an offshoot of the Morgan banking dynasty that has counseled
corporate America since the Depression. John J. Mack, the bank’s chief
executive, said he took full responsibility and would forgo a bonus for
2007.

Like Citigroup and UBS of Switzerland, Morgan Stanley has turned to a
wealthy investor from the East after losing billions of dollars on
subprime-tainted investments. Morgan Stanley lost $3.59 billion for the
fourth quarter. It said its remaining subprime exposure was $1.8
billion.

The drastic losses may heighten speculation about the fate of Mr. Mack,
who returned to the firm in 2005 after the removal of his predecessor,
Philip J. Purcell. One of Mr. Mack’s signature changes was to push the
firm further into trading using its own capital, an effort to emulate
its profitable archrival, Goldman Sachs. His strategy worked for a
while but then backfired when trades in tricky subprime-linked
securities went wrong, resulting in the biggest write-down in the
firm’s history. While Mr. Mack is expected to keep his job, his
compensation will plummet — one of the harshest punishments meted out
on Wall Street, short of showing an executive the door. Last year, he
made $40 million; this year, he will take home about $800,000. His
paycheck is particularly humiliating since Lloyd C. Blankfein, the
chief executive of Goldman Sachs, is likely to receive a $70 million
bonus. James E. Cayne, the chief executive of Bear Stearns, is also
expected to forgo a bonus.

In a conference call on Wednesday, Mr. Mack was quick to take
responsibility. “The results are embarrassing for me and the firm,” he
said.

But he also pointed out that the bulk of the $9.4 billion loss occurred
on one trading desk and that other areas of the firm, particularly the
investment banking, asset management, retail brokerage and hedge fund
servicing businesses, performed well.

As for the investment from China, Mr. Mack framed the transaction not
as a desperate act but as a strategic move. And he refused to concede
that Morgan Stanley was a weakened firm. “We remain bullish on Morgan
Stanley’s significant growth potential,” he said.

Still, the investment shows how reliant Morgan Stanley and Wall Street
are on foreign funds and gives additional credence to the joke now
circulating on trading floors: “Shanghai, Dubai, Mumbai or goodbye.”

The fund, the China Investment Corporation, has agreed to purchase
almost 10 percent of Morgan Stanley; it will have no role in the
management of the firm.

Citigroup recently sold a stake to a Middle East fund.

The deal is an abrupt shift in strategy for China’s $200 billion
sovereign fund and underlines the extent to which it appears to be
under the direct control of the country’s leaders.

Morgan Stanley executives first began discussing an investment with the
fund this summer, but it was not until recently that the deal was
struck.

For Morgan Stanley, the terms are severe. The firm will pay annual
interest of 9 percent on bonds that will be convertible into Morgan
Stanley stock in 2010.

The China Investment Corporation is under the control of China’s
finance ministry, with some influence as well from the People’s Bank of
China, the country’s central bank. There has been discussion in the
Chinese government over whether even more foreign currency should be
injected into the investment fund, as the People’s Bank of China
continues to accumulate $1 billion a day as it buys up dollars to
prevent the value of China’s currency from rising in international
markets.

The loss at Morgan Stanley highlights a sense of strategic confusion
within the firm. Going back to the firm’s early days when it broke off
from the Morgan Bank, Morgan Stanley’s strength has been its investment
banking and advisory business areas; both did well this year.

Mr. Mack, however, was eager to strike a more aggressive pose when he
took over from Mr. Purcell, who had been criticized for his cautious
approach. By encouraging his traders to take on more risk, Mr. Mack
plunged Morgan Stanley into a complex, sophisticated and dangerous area
that has never been a core area of competence for the firm.

In the conference call, Mr. Mack confronted tough questions from
analysts.

“How could this happen?” asked William F. Tanona, an analyst with
Goldman Sachs. “How could one desk lose $8 billion?”

Mr. Mack, generally a brash, expansive man, struck a chastened tone. He
said the firm would be dialing back from making big trading bets.

“We had been sprinting,” he said. “Now we will be jogging. But we are
in a risk business, and we will be in the market taking risk.”

Mr. Mack blamed the firm’s inadequate risk-monitoring procedures and
said the firm’s risk managers would now report to the chief financial
officer, which is the practice at Goldman Sachs. Previously the risk
managers had reported to Zoe Cruz, the co-president overseeing trading,
who was ousted by Mr. Mack last month, a further indication that the
firm’s big bets lacked objective risk oversight.

Investors, while upset over the loss, seemed to be giving Mr. Mack the
benefit of the doubt. Shares of Morgan Stanley’s rose $2.01, to $50.08.

“He can’t have another screw-up,” Brad Hintz, a securities analyst at
Sanford C. Bernstein & Company, said of Mr. Mack. “But the clients I
have talked to have not been calling for his scalp.”

Morgan Stanley had previously said it would take a $3.7 billion
write-down from the trading. Now, the total loss from that trading is
$7.8 billion. Morgan Stanley reported an additional $1.2 billion in
write-offs from nonperforming loans. The total loss wiped out
fourth-quarter revenue. For the year, Morgan Stanley has taken nearly
$11 billion in trading and subprime-related charges.

Other Wall Street firms have ousted their chief executives after such
losses. Charles O. Prince III of Citigroup and E. Stanley O’Neal of
Merrill Lynch lost their jobs over escalating subprime write-downs.

By all accounts, Mr. Mack still has the support of his board, which
includes four holdovers from the Purcell era. And unlike Mr. Prince and
Mr. O’Neal, who were to some extent outsiders, removed from the culture
of their respective firms, Mr. Mack, has ties to the firm’s glory days
in the 1970s and 1980s and with his ability to charm, he is still liked
within the firm.

In addition to keeping his board fully briefed, Mr. Mack has also
reached out to the former executives who led the campaign to oust Mr.
Purcell. On Wednesday, he called Robert Scott, a retired senior
executive of Morgan Stanley, and briefed him on the results.

“We are here to help,” said Mr. Scott, according to a person who was
briefed on the call.

For the moment, the board seems to be in no position to force Mr. Mack
from his job. Not only is he well liked, but he also has no ready
successor and as the protracted search for a Citigroup head
demonstrated, there is a dearth of outside executives ready and willing
to take on such a job.

Keith Bradsher contributed reporting.

                                 ***


Reuters via NY Tmes - Dec 19, 2007
http://www.nytimes.com/reuters/business/business-morganstanley.html

Morgan Stanley Posts Loss, Sells Stake to China

By REUTERS

NEW YORK (Reuters) - China has agreed to pump $5 billion into Morgan
Stanley as the U.S. investment bank reported a stunning fourth-quarter
loss fueled by $9.4 billion of losses in subprime mortgages and other
assets.

China's investment, which could translate into as much as a 9.9 percent
stake in Morgan Stanley, marks the latest capital infusion by a
sovereign wealth fund into a major investment bank hurt by this year's
credit crunch.

Morgan Stanley <MS.N> shares rose more than 4 percent as investors
hoped the large write-downs and cash injection by China's foreign
exchange fund may be signs of the beginning of the end of the subprime
mess. But some skeptics said the deal was a sign of weakness.

"This is a painful deal," Sanford Bernstein analyst Brad Hintz said in
a research note. "When you leverage a brokerage firm up 31 times and
you take a loss, you don't have any choice but to negotiate a nice deal
to bring in equity capital."

Unlike his colleagues at Merrill Lynch and Citigroup, Morgan Stanley
Chief Executive John Mack did not step down, but said he would forego
his bonus this year. Mack, who pocketed $37 million in salary, bonus,
restricted stock and other compensation last year, last month ousted
protege and co-President Zoe Cruz and shook up the firm's fixed income
and risk management leadership.

"The results we announced today are embarrassing for me," Mack said in
a conference call of the investment bank's first quarterly loss in its
72-year history.

Last month, Morgan Stanley said traders betting the bank's own capital
had incurred $3.7 billion in losses on U.S. subprime mortgages. On
Wednesday, the bank disclosed another $5.7 billion in write-downs,
reflecting further declines in the mortgage trades and losses on other
debt.

To restore its capital, Morgan agreed to sell equity units that pay a 9
percent coupon. China will be a passive investor.

The deal reinforces Morgan Stanley's ties to China's vast, rapidly
growing markets. More than a decade ago, Mack, then its president,
helped forge the China International Capital Corp banking venture in
which Morgan owns a passive 34 percent stake.

Earlier this month, Mack traveled to China to forge a new investment
banking venture with Shanghai-based China Fortune Securities. The bank
is pursuing licenses that will let it undertake banking and money
management operations there.

Morgan Stanley is the latest big bank bailed out by sovereign funds
recently.

Citigroup Inc <C.N> agreed last month to sell a 4.9 percent stake to
Abu Dhabi for $7.5 billion, while UBS accepted a $9.75 billion
investment from Singapore's investment arm.

EMBARRASSING

With the write-downs knocking down earnings by $5.80 a share, Morgan
Stanley posted a net loss from continuing operations of $3.59 billion,
or $3.61 a share, in the quarter ended November 30.

A year earlier, Morgan had income from continuing operations of $1.98
billion, or $1.87 a share. Morgan's results reflect the spin-off of
Discover Financial Services <DFS.N> in July.

Analysts expected Morgan Stanley to lose 39 cents a share.

Morgan Stanley's results come a day after Goldman Sachs Group Inc
<GS.N> reported a 2 percent profit increase as its fixed income traders
sidestepped the credit problems that snagged the rest of Wall Street.
Lehman Brothers Holding Inc <LEH.N> said last week that earnings fell
12 percent after $3.5 billion in write-downs.

Morgan said $7.8 billion in write-downs came from subprime trading
positions that fell further after the bank's November 7 warning. Morgan
also wrote down $1.6 billion of mortgages held by a bank unit,
commercial mortgages and other loans.

It is a sizable loss compared with Citigroup, which last month warned
it could write off assets worth $8 billion to $11 billion. Merrill
Lynch & Co Inc <MER.N> wrote off $8.4 billion in the third quarter,
with more losses expected.

Morgan said it reduced its exposure to problem assets during the
quarter. U.S. subprime mortgage were pared down to $1.8 billion on
November 30 from $10.4 billion in August.

"The fact that there's only $1.8 billion left in subprime exposure
suggests they are getting to the end," said Steve Goldman, market
strategist at Weeden & Co in Greenwich, Connecticut.

The trading debacle was the first serious setback for Mack since he
replaced Philip Purcell as CEO in 2005. Mack directed the bank to take
on more risk and expand businesses such as mortgages and leveraged
lending to boost profit and growth.

Earlier this year, those efforts were paying off as Morgan reported
mortgage gains, even as subprime markets started to falter. But
Morgan's proprietary bet against mortgages backfired as the market
worsened beyond what traders expected.

Morgan Stanley's institutional securities unit posted a pretax loss of
$6.5 billion, compared with $2.2 billion of pretax income last year.

OUTLOOK

Executives at Morgan Stanley said the losses overshadowed strong
results from the rest of the company, including record annual revenue
in many businesses and rising profit from overseas markets. Within
fixed income, foreign exchange and interest rate trading, results were
strong.

"This loss was the result of an error in judgment that occurred at one
(trading) desk ... and a failure to manage that risk appropriately,"
Mack said.

Morgan Stanley shares closed up $2.01 at $50.08 on the New York Stock
Exchange, even as Morgan Stanley executives offered a sobering outlook
and warned that its credit and mortgage business would slow.

Chief Financial Officer Colm Kelleher told Reuters the bank would
suspend buybacks as it reviews its capital levels and investment plans.
Mergers and leveraged buyout activity also is expected to slow.

"The near-term outlook is challenging," Mack said. "The mortgage
business is going to be dramatically reduced. Credit and leveraged
lending will be on a lower basis as well."

The slowdown in some businesses means Morgan Stanley, which announced
900 layoffs in recent weeks, may cut more jobs and shift resources to
other, faster-growing areas, Kelleher said.


                                       ***

Intl Herald Trib - Dec 19, 2007 
http://www.iht.com/articles/2007/12/19/opinion/edbowring.php

The scourge of liquidity 

By Philip Bowring

HONG KONG: The United States, Britain and the European Union seem to 
think they can debase their currencies without their creditors in the 
rest of the world - most of them in Asia - noticing.

That is the only construction that can be put on recent decisions by
the U.S. Federal Reserve, the European Central Bank and the Bank of
England to flood the markets with "liquidity."

The ECB is making available to institutions almost limitless amounts of 
cash, not at appropriate penalty rates but at subsidized ones. The Fed 
is auctioning low interest loans to holders of mortgage-backed 
securities. The president of the New York Federal Reserve, Timothy 
Geithner, suggests that still "additional instruments" may be needed to 
provide funds to banks.

"Liquidity" may sound positive enough, a substance that oils the wheels 
of commerce. In reality, the central bankers have been creating more 
paper money, to the legitimate concern of those holding the existing
stock.

Money is created in the hope that volume alone can substitute for the 
lack of trust that exists between financial institutions, which has 
pushed inter-bank interest rates above those the central banks deem 
appropriate. Central banks are trying to thwart a central tenet of 
market capitalism - that the price of credit should reflect perceived
risk.

The process of money printing can only make those who hold the bonds
and other debt of the countries concerned look for almost any
alternative, particularly a resource - be it gold, oil soybeans - that
cannot be created by the stroke of a pen.

The supposed cure for the sub-prime mortgage crisis and related
diseases is actually more damaging than facing up to the consequences
of past mistakes. Money was already being created on a vast scale,
despite an existing global abundance fueled by, among other factors,
U.S. trade deficits.

Global foreign exchange reserves (the currencies in which other 
country's hold their official reserves - mostly dollars, euros, yen and 
pounds) have been rising at a 25 percent annual rate. Now yet more
money is being flooded into the market, despite the fact there is
already an abundance as shown by real (inflation adjusted) interest
rates, which are very low by historical standards.

The ECB is printing more money at a time when inflation is running at 
over 3 percent, far above the level that is supposed to be acceptable. 
Year on year consumer prices in the United States are up 4.3 percent - 
they would be much higher if European calculation methods were used - 
and show little sign of abating.

By that measure, the Federal Funds rate should be more like 6.5 percent 
than 4.25 percent. Interest rates are far too low either to squeeze out 
inflation or secure the rise in savings, which the United States needs 
if it is to cease reliance on foreign capital.

Recent improvements in the current account deficit have been much 
trumpeted, but at over 5 percent of GDP it remains a shameful
reflection of the U.S. sense of entitlement.

Almost everywhere in the developed world, very low or negative real 
interest rates were already defrauding the citizens who saved hard for 
retirement. Now floods of cheap, inflationary money created mainly to 
bail out financial institutions will make the future of responsible 
retirees even bleaker. And it will undermine the trust that foreign 
holders have in Western banks and institutions.

It will also undermine that critical element in capitalist societies: 
the need for trust. The official money flood is supposed to substitute 
for the lack of trust that private financial institutions currently
have in their peers because of the opaque nature of the instruments
they have created.

But using freshly printed money to paper over the cracks cannot restore 
trust. The only way to do that is for these institutions to be open 
about their assets and liabilities and subject them to the test of 
marketability.

It will be painful. Those who previously worked hardest to drive credit 
prices to ridiculously low levels will suffer most. Some will go bust. 
But the fittest will survive and trust will be restored - not merely in 
institutions but in the money and credit system.

As it is, the central banks are abandoning their responsibilities for 
maintaining the integrity of their currencies in a vain attempt to 
compensate for past regulatory failures. The result may slow the fall, 
but it will further boost inflation, and speed the decline of Western 
dominance of the global financial system.

The contrast with Asia 10 years ago is instructive. Foreign currency 
debt forced dramatic but short-lived recessions on Asian borrowers, 
followed by a sustained period of growth with low inflation and 
eventually to strong currencies backed by huge reserves.

Now the United States, Japan, Britain and the countries of the euro
zone face the opposite: inadequate adjustment and minimal growth
accompanied by high inflation and declining faith in the integrity of
their currencies. Reserve status has become an opiate. 

Copyright ) 2007 The International Herald Tribune


                             ***

Asia Sentinel - Dec 20, 2007
http://asiasentinel.com/index.php?option=com_content&task=view&id=944&Itemid=35

Chancy Shopping in a New Bargain Basement 

by Philip Bowring

The easy snapping up of big Wall Street names by Chinese and Gulf-state 
buyers could come back to haunt everybody

It's never easy to know what do when you win the lottery. So sympathy
is due for China and the Gulf states as they attempt to put their
trillion dollars of liquid assets to work more effectively than buying
US government debt or high-risk bonds.

But it is fascinating to watch how they are becoming an easy touch for 
US financial institutions caught in a vortex of their own design. First 
there was Blackstone. Many people smelled a rat when the king of
private equity suddenly wanted to go public, enabling its founders to
collect a few billion in cash.

China eagerly bought US$3 billion of the stock assuming that this was a 
gilt-edged American name and probably expecting that Blackstone's IPO 
would be like a Chinese one  immediately going to a huge premium that 
would enable those with the pre-IPO inside track to exit at a huge 
profit. Unfortunately, the Blackstone issue just happened to be
superbly timed (from the vendors' viewpoint) to subject the Chinese to
almost instant big losses.

They would of course learn: buy distress not euphoria. So it seemed an 
easy bet when along came Citigroup crying to the bloated sovereign 
wealth funds for new capital to plug the holes left by having to bail 
out special investment vehicles that supposedly had never been on the 
balance sheet in the first place.

Even low-profile Abu Dhabi was so thrilled to be asked to rescue 
America's biggest financial institution with a $7.5 billion injection 
that it barely bothered with due diligence  such as whether or not Citi 
had been presenting bogus accounts on the balance sheet in the first 
place. If they did not have contingent liabilities in respect of their 
illegitimate progeny, why did they take them in-house? Has Citi
suddenly discovered compassion for the sick and dying? It seems
unlikely.

But it stroked egos to be asked to lead the bailout and help out not 
just America but its big Saudi mate Prince Alwaleed. The prince had
done rather well by bailing out Citi the last time it screwed up and 
doubtless Citi dreamed that if Abu Dhabi did the same the stock would
be up five-fold in no time at all. The Saudi prince was of course very 
supportive  otherwise he would have had to dig deep into his own pocket.

The Chinese, meanwhile, are obsessive enough about designer labels to 
know that neither Blackstone nor Citi are quite top rank. More quantity 
than quality, perhaps. They didn't need to keep looking into shop 
windows long before a "sale of the century" sign started flashing at 
that oldest of names, Morgan Stanley, now No. 2 in Wall Street's
pecking order of over-remunerated speculators. It did not do any harm
that the Hong Kong-based boss for China was none other than Stephen
Roach, an amiable economist who had been sent there because he was
bullish about China while being mega bearish about most other places,
especially the US.

China now thinks it has got a bargain by getting 9 percent of Morgan 
Stanley for filling a little hole in the balance sheet caused by that 
dubious debt normally described as "sub-prime" but actually including a 
lot of junk previously accorded "A" status by the best rating agencies 
that money can buy. This is, of course, just a one off event and Morgan 
Stanley will soon be back on track to make billions from some new
device to skin the gullible.

China thinks these are good deals. Morgan Stanley and Citi think that 
with huge official foreign shareholders they now have an inside track
to all kinds of flotations, bond issues, mergers, etc. on the mainland. 
Even more offspring of Chinese Communist party bosses will get into 
Harvard and Wharton and before long will become "rainmakers" for the 
Wall Street types.

Maybe they are right and Blackstone, Citi and Morgan Stanley will be 
seen as great bargains, magic words to open the secret inner doors of 
western finance. But the perspective of this observer is that in 
downturns the problems of financial institutions are worse than those
of other groups, and they end up being far worse than anyone imagined
when problems were first reported. Every such event causes at least one
huge collapse, be it an Enron, a Drexel Burnham, a Slate Walker, a
Franklin National ad infinitum.

China will of course have been mighty impressed that the biggest name
on Wall Street, Goldman Sachs, is  we are told  still doing just fine
at the expense of others. This must give former boss and now US
Treasury Secretary Hank Paulson much face in his dealings with Beijing.
The guys who invented some of the financial games have kept enough of
the know-how not to get caught on the wrong side. Yet.

But if further disasters await, one must wonder if it does much good
for the western institutions to be part Beijing-owned. The more such 
investment funds and companies the Chinese have, the less clout and 
advantage any one foreign institution has in China, yet the greater the 
susceptibility to criticism at home for their China connections. This 
could be the opposite of a win-win deal. 

Copyright ) 2007 AsiaSentinel.com

                      ***

The New York Times - Dec 20, 2007
http://www.nytimes.com/2007/12/20/business/21wall-web.html

Bear Stearns Loss Presages More Turmoil

By MICHAEL J. de la MERCED

Bear Stearns reported its first quarterly loss ever in its eight-decadehistory on Thursday, stung by the mortgage crisis that has swept
markets across the globe.

That turmoil has afflicted firms as diverse as top Wall Street banks
and small student-loan providers. And while reported losses have topped
$40 billion so far, analysts say that figure could climb even higher.

Morgan Stanley, a larger rival of Bear Stearns, reported its own
multibillion-dollar loss on Wednesday, one that forced it to sell a
stake to a Chinese sovereign wealth fund. Firms like Merrill Lynch that
have already reported losses are expected to announce more next month.
Even Goldman Sachs, which reported a modest profit on Tuesday, has not
been immune to a decline in its stock price amid fear that it could
face pain next year, too.

Bear Stearns said it lost about $854 million, or $6.90 a share, for the
fourth quarter, compared with a profit of $563 million, or $4 a share,
in the period a year earlier. Analysts surveyed by Bloomberg News had
expected a loss of $1.82 a share.

Bear Stearns also said it had written down $1.9 billion of its holdings
in mortgages and mortgage-based securities, up from the $1.2 billion it
had anticipated last month. As a result of its disastrous results, Bear
Stearns said its management will not receive bonuses this year.

The news caps a disastrous year for the investment bank, one of the
nation’s largest underwriters of mortgage bonds. Beginning this summer
with the housing slowdown, Bear Stearns has stood as the prime example
of how Wall Street’s big bet on securities based on risky home loans
went south.

While many of its peers, including Merrill, Morgan Stanley and
Citigroup, have announced far more in write-downs, Bear Stearns draws
far more of its profit from its trading operations. That was reflected
in its fixed income unit, which reported a net loss of $1.5 billion,
down sharply from the $1.1 billion in profit the bank reported for the
same time last year.

“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,” James E.
Cayne, Bear Stearn’s chairman and chief executive, said in a statement.

The fate of Mr. Cayne, its longtime leader, has been the subject of
much speculation on Wall Street since this summer. As two internal
hedge funds that had bet on home mortgages began to crumble, questions
about Mr. Cayne’s leadership arose. Reports that he had gone golfing
during the worst parts of that crisis did not help.

The investment bank lost so much capital that Bear Stearns formed a
partnership this fall with China’s Citic Securities, in which the two
firms swapped shares. Though not as drastic as other firms’ measures to
shore up capital — Morgan Stanley on Wednesday announced the sale of a
$5 billion stake to China’s sovereign wealth fund, and both Citigroup
and UBS made similar deals with Middle Eastern and Asian governments —
it was a reflection of how weak Bear Stearns had become.

The firm has also suffered much internal turmoil. Mr. Cayne fired his
heir apparent and the man who oversaw those bad bets, Warren J.
Spector, leaving Bear Stearns with an uncertain future. Alan D.
Schwartz, who was co-president alongside Mr. Spector, comes from the
firm’s investment banking side and is less familiar with its core
trading operations.

And those hedge funds are continuing to give the investment bank
headaches. Ralph Cioffi, the man who managed the funds, left the firm
last week amid reported investigations into whether he improperly
withdrew money from those funds before they imploded.

Some of Bear Stearns’s businesses reported gains, but sometimes barely.
Its equities trading operation reported net revenue of $381 million, an
11 percent drop from last year.

Its investment banking business, which constitutes a far smaller
portion of the firm’s profits than at its larger rivals, reported $205
million in revenue, a 44 percent drop from last year. Even there, the
bank felt pain from the debt markets, as lower fees from fixed-income
underwriting cut into higher revenue from its financial advisory work.

The firm’s global clearing services reported revenue of $276 million, a
modest 2 percent gain from the same time last year. Its wealth
management business showed some of the same gains made across the
industry, posting revenue of $272 million, or up 10 percent from last
year.

Bear Stearns’s return on equity, a measure of how efficiently the firm
is using its capital in its own trades, dropped to negative 29.1
percent, down steeply from 20.5 percent last year.