By Bradley Keoun
Feb. 8 (Bloomberg) -- Bear Stearns Cos., the U.S. securities firm that posted its first-ever loss last quarter on mortgage writedowns, has more than $1 billion of trades that profit if subprime home loans and bonds continue to deteriorate.
The ``short'' positions on subprime mortgage securities increased from $600 million at the end of November, Chief Financial Officer Sam Molinaro said today at an investor conference in Naples, Florida. The company also reduced its holdings of so-called collateralized debt obligations and underlying bonds, Molinaro said.
The sinking value of assets tied to mortgages led to Bear Stearns's fourth-quarter loss of $854 million, and Molinaro said today that one of the firm's biggest mistakes was ``not being conservative enough and bearish enough on the subprime market.'' The firm has reversed ``long'' subprime trades that stood at $1 billion at the end of August, Molinaro said.
``There's definitely a lot of short plays out there,'' said Mark Adelson, a founding member of Adelson & Jacob Consulting in Long Island City, New York. Some subprime bonds ``could easily be bad enough that they don't pay off a penny,'' said Adelson, a former Nomura Holdings Inc. mortgage analyst.
In an interview after Molinaro's remarks, Bear Stearns spokesman Russell Sherman said the New York-based firm's subprime trades are a ``hedge'' against potential losses on investments in higher-rated mortgages, he said.
``We are using short positions to offset other long positions in our mortgage inventory,'' Sherman said. He didn't provide details on specific trades.
The company, the fifth-largest U.S. securities firm by market value, dropped 46 percent in New York trading last year, more than any Wall Street rival, leading James ``Jimmy'' Cayne to hand the chief executive officer role to Alan Schwartz last month.
Bear Stearns fell $2.36, or 2.8 percent, to $80.67 in composite trading on the New York Stock Exchange at 4:10 p.m.
Last year's performance by Bear Stearns contrasts with that of hedge fund manager John Paulson's Paulson & Co., which made $2.7 billion in fees in the first nine months of the year by betting against subprime-mortgage bonds as more borrowers fell behind on monthly payments.
Two Bear Stearns hedge funds that invested in securities tied to mortgages collapsed in July, prompting investors to shun the debt. Bear Stearns had to bail out the funds and take possession of many of the securities.
``We have significantly reduced our exposures'' to the subprime mortgage market and CDOs, Molinaro said.
The world's largest banks and securities firms have reported at least $146 billion of writedowns and credit losses stemming from the ensuing credit-market contraction, according to Bloomberg data.
About 30 percent of Bear Stearns's fixed-income revenue comes from mortgages and related securities, according to estimates from Sanford C. Bernstein & Co. analyst Brad Hintz. The company's $1.9 billion mortgage writedown wiped out revenue in the three months ended Nov. 30.
Adelson said he would pay more attention to Bear Stearns's strategy shift if it were coming from Berkshire Hathaway Inc. Chairman Warren Buffett.
``I think of Warren Buffett as a guy who's almost always right, and at this stage of the game I don't think of Bear that way,'' Adelson said.