Bear Stearns Plummets on Insolvency Fear

Whispers that the New York-based bank is in trouble dragged the company's stock to its cheapest price since just after the September 11th terrorist attacks.

Punk Ziegel analyst Richard X. Bove said people are worried that Bear Stearns has a lot of investments it will not be able to sell. A distaste for risk in certain corners of the bond market has depressed the value of a slew of types of investments and drained liquidity from the market.

Bear Stearns lends money to hedge funds, some of which are running into trouble themselves, Bove said. Some of these beleaguered hedge funds are surrendering their investments to Bear Stearns, which only piles on more paper the bank is unable to sell, he said.

"You can't sell them, and therefore your balance sheet is getting locked," he said.

Bear Stearns' stock plummeted more than 7 percent to close at $57. The stock earlier in the session touched as low as $50.48, the cheapest trade since 2001. The shares, which neared $160 last April, are down more than 20 percent this week and down 30 percent so far this year.

Bove said the plunge in the stock suggests the market is handicapping a better than 50 percent chance Bear Stearns goes bankrupt.

He said that fear makes sense, but he does not think the Federal Reserve will allow that to happen. The Fed would bail Bear Stearns out before allowing the bank to dump upward of $275 billion of tainted investments on a market that currently has little appetite for risk, he said.

Bove believes Bear Stearns was on the Fed's mind when it unveiled a plan to swap $200 billion in Treasuries with banks for hard-to-sell mortgage debt.

Bear Stearns has denied rumors it is facing a liquidity squeeze. A call to the company Thursday wasn't immediately returned.