Chickens come home to roost

It is better to remain silent and be thought a fool than to open one's mouth and remove all doubt.
Abraham Lincoln

Bear Stearn's (BSC) management are probably wishing they hadn't opened their mouths on Friday in response to S&P's somewhat belated downgrade.

On Friday S&P downgraded the outlook of Bear Stearn's credit ratings to negative. Not surprisingly Bear Stearns weren't too happy and tried to reassure investors via a conference call - it didn't work. BSC stock fell more than 7.0% as the broader tumbled and more than 2%.

The comments from CFO Sam Molinaro were more revealing than reassuring. For example:

"We've been in a mode where the appropriate path is to preserve our capital and try to weather the storm,"

"When we get back to more normal times, we get back to a philosophy where buying shares may be an appropriate strategy,"...."Right now our goal has been to preserve liquidity and make sure that we were abundantly liquid and can weather the storm."

Translation - All hell has broken loose and we are holding on for dear life hoping none of our other funds get smashed. We can't buy back any shares because our capital base is being eroded by the day.

More revealing were comments by Molinaro and CEO James Cayne that the problems with subprime mortgages and market liquidity during the past 2 months as akin to some of the worst downturns in history.

Molinaro added that current conditions in fixed-income markets are the worst he has seen in his 22 years in the business. Did they think this was going to reassure anyone? More comforting comments from the CFO:

"Fixed income revenues will suffer from lower activity in the short-term,"

Translation - earnings will be hurting next quarter. Earnings for all brokers will be interesting next quarter.

"We've just weathered a pretty significant storm." "We've been able to navigate through that fairly well. Hopefully, August will be better."

Hope, so that's what it's come down to now.

"We've been in a period of gridlock for quite some time." "Everyday brings new information. I don't know what the catalyst is going to be."

Translation - we don't have clue when this will ease up. What if there is no catalyst? What do you do then Sammy-boy? Hope some more?

How about this classic from the CEO:

"The risk management infrastructure and processes remain conservative and consistent with past practices. This structure and strong risk management culture has allowed the firm to operate for all of its history as a public company without ever having an unprofitable quarter,"

Conservative? Strong risk management practices? The world according to James must be an interesting if somewhat delusional place.

How about no risk management practices? Resulting in the leveraged up toxic sludge in two of their funds now being completely worthless. A classic case of chickens coming home to roost.

The question is how many other coops are waiting for their chickens to come home?