Bear Stearns sees $1.2 billion writedown

NEW YORK (Reuters) - Bear Stearns Cos Inc (NYSE: - ) said on Wednesday it expects to write down $1.2 billion of assets linked to mortgages in the fourth quarter, soothing investors who had feared multibillion-dollar writeoffs and sending its shares higher.

The writedown, equal to about 9 percent of Bear Stearns' equity as of the end of August, will result in a net loss, but the bank's shares rose 5.3 percent.

"There was a sense Bear Stearns would have to take a large writedown, and now people can put their arms around it," said Adam Compton, co-head of global financials research at RCM Global Investors in San Francisco, which has about $160 billion of assets under management.

Months after Bear said that it was bailing out two hedge funds it managed that were roiled by mortgage losses, Chief Financial Officer Sam Molinaro said its business was showing signs of improving. But the market is still challenging, and the size of the writedown may change, Molinaro said.

"I wouldn't want to predict that things couldn't get worse, because they seem to keep surprising people," Molinaro said, adding that the bank has marked down assets to levels it believes are "prudently conservative."

The Bear Stearns writedown was smaller than many of its peers. Morgan Stanley, for example, said it expected $3.7 billion of writedowns last week. But Goldman Sachs Group said on Tuesday that it expected no writedowns, triggering a relief rally across the U.S. financial sector.

Bear Stearns reduced its exposure to subprime mortgage bonds and repackaged mortgage bonds known as collateralized debt obligations since the end of August, Molinaro said at a Merrill Lynch & Co banking conference.

By being short subprime mortgage bonds, Bear Stearns is now positioned to profit if they weaken further, Molinaro said. But Bear Stearns still has a net $884 million of exposure to collateralized debt obligations.

"This has been an incredibly challenging period," Molinaro said.

SIGNS OF IMPROVEMENT

A number of Bear Stearns' businesses are showing signs of recovery after a difficult summer.

Prime brokerage is regaining business from some customers, after market turmoil in July and August spurred many hedge funds to move more of their funds to large commercial or universal banks they perceived as safer. Balances are steady from the third quarter, Molinaro added.

Leveraged finance suffered writedowns in the third quarter, but that business is improving as well, Molinaro said.

Bear Stearns shares have fallen 35 percent this year, compared with a 10 percent decline for the sector as measured by the Amex Securities Broker-Dealer Index. (AMEX: - ) The fifth-largest U.S. investment bank by market cap generates more of its revenue from mortgage securities and domestic markets than many of it peers, which has left it poorly positioned as the housing market has tumbled.

Bear Stearns shares rose $5.30 to $106.17 on Wednesday morning.

(Editing by Gerald E. McCormick and Dave Zimmerman)