Bear Stearns stock plunges amid risk worries

By Joseph A. Giannone

NEW YORK (Reuters) - Shares of Bear Stearns Cos BSC.N plunged Thursday amid worries that hedge funds and other traders are nervous about entering into long-term trades with the Wall Street bank weakened by heavy mortgage market losses last year.

The fifth-largest U.S. securities firm, known as a trader and underwriter of mortgages and other debt, in recent days has batted down speculation it is strapped for cash. Executives say it has enough capital and cash to weather the current storm.

Yet hedge funds and banks handling long-term trades, such as credit-default swaps, are being extra cautious when Bear is a counterparty, the Wall Street Journal reported Thursday.

Bear shares fell as much as 15 percent to its lowest level since October 2002 earlier in the session. Shares have declined nearly 27 percent overall this week.

Credit default swaps widened 1.2 percentage points to 700, according to Phoenix Partners, which means the cost of insuring $10 million of Bear debt for five years now costs $700,000. It was $300,000 two weeks ago.

Trading in Bear put options was also active, suggesting investors expect Bear common shares to fall further. Roughly 191,000 puts, compared with 67,000 calls, on Bear stock had changed hands by 11:30 Chicago time, according to Trade Alert.

That's a bearish 2.87 puts for every call on trading volume seven times its average put turnover over the past five days.

The paper reported trading clients of rivals like Goldman Sachs and Morgan Stanley asked those firms to be counterparties to Bear for completed transactions. Meanwhile some hedge funds that use Bear as a prime broker have been shifting portions of their business to other firms, the paper said.