Wall Street banks dodge subprime bullet

Bear Stearns becomes latest investment brokerage to post solid results, despite turmoil in subprime mortgage market.

By Grace Wong, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Troubles in the risky home loan market may have investors on edge, but Wall Street firms don't appear to be shaken for now.

Bear Stearns (Charts) CFO Samuel Molinaro said Thursday conditions will be "challenging" in the short term but that subprime problems don't appear to have spilled over to the broader mortgage market.

He echoed the view fellow investment brokerages Goldman Sachs (Charts) and Lehman Brothers (Charts) offered earlier this week.

Rising defaults have roiled the market that gives home loans to borrowers with poor credit, putting the spotlight on Wall Street firms which have bankrolled much of that lending.

Bear Stearns said turmoil in subprime dampened its mortgage business in the first fiscal quarter. But "we're feeling pretty comfortable with where we are," Molinaro told analysts during a conference call.

He said that ongoing troubles would generate opportunities for the company to delve deeper into subprime. Given the trouble many companies have faced with subprime portfolios, a large bulk of assets will likely be coming up for sale, he said.

Lehman CEO Chris O'Meara made similar comments on Wednesday, saying he sees opportunities emerging from the market dislocation.

Wall Street firms appear so far to have resisted troubles in subprime. Bear Stearns' results topped expectations, and Goldman and Lehman posted record results. The first quarter typically is the strongest for investment brokerages.

Wall Street firms have made a lucrative business out of buying home loans, repackaging them and selling them as securities. They also provide financing to subprime lenders and some even make direct loans to subprime borrowers.

But they could lose out on business as lending requirements become stricter. Last year, lenders in the subprime sector made more than $600 billion in mortgage loans, about a fifth of the total mortgage market.

Molinaro predicted a slowdown in subprime loan origination, saying volume could be cut by 25 to 30 percent, which would likely slowdown securitization activities.

Bear Stearns and Lehman generate a bigger chunk of their revenue from mortgage-backed securitization than their Wall Street competitors.

The biggest question facing those watching the sharp rise in subprime defaults has been whether trouble will spread to other parts of the mortgage market.

That doesn't appear to be have happened yet. "So far you really have not seen any contagion from the subprime markets to the other parts of the mortgage market," Goldman Sachs CFO David Viniar said during a call with analysts on Tuesday.

But if it does, economists say that could put the brakes on the housing recovery and send ripple effects through the broader economy.

And that could pressure future results for investment banks. Most of the subprime problems, after all, only began surfacing in February, toward the end of their fiscal first quarter.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.