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Bear Stearns Executive Says Subprime Problems not Contagious
Marketwatch
By Jamie Miyazaki
August 2, 2007

A senior Bear Stearns Cos. executive Thursday said the sharp sell-off in global credit and equity markets triggered by that collapse of two of the firm's hedge funds is ultimately unlikely to derail the global economy.

Michel Peretie, Bear Stearn's chief executive officer for Asia and Europe, said problems stemming from the tightening of credit and access to leverage caused by July's hedge fund implosion should stay contained to the U.S. subprime mortgage market and leveraged buyouts.

"This is not contagion....The market was showing excess in the subprime and leveraged buyout markets," Peretie said.

Rising defaults by borrowers in America's subprime mortgage market have cast doubt over the pricing of illiquid derivative debt securities called collateralized debt obligations, or CDOs, whose cashflows are based on borrowers' mortgage repayments.

But investors have begun to question the easy availability of credit since July 16, when Bear admitted two of its highly leveraged funds were effectively worthless due to valuation problems with their CDOs. That scrutiny involves not just U.S. home owners, but also the private equity funds that have fueled many of the recent gains on U.S. stock markets.

Since then, the benchmark S&P 500 index has lost 6.5% while yields on 10-year U.S. treasuries have also tumbled to 4.8% from 5.1% as investors have dumped stocks for the comparative safety of government bonds.

Global stock markets and hedge funds have also been caught up in the turmoil. Japan's Nikkei 225 Stock Average has shed 6.8% while Australian investment bank Macquarie Bank Ltd. became the latest company to be swept up in the panic after it said two of its high-yield funds were likely to suffer sharp losses due to the sudden fall in value of high-yield bonds.

The spotlight on Bear's funds comes as the Wall Street firm tries to ramp up its presence in Asia, an area that it has traditionally lagged behind rivals, such as Merrill Lynch & Co. and JPMorgan Chase & Co.

Peretie said the company faced potential image problems in its effort to build up its franchise in Asia, which he said currently contributes just 6% of global revenues for the company.

"We are dealing with a reputational issue, which is never easy to do," he said.

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