Bear Stearns: Is Cayne Walking?

Company president Alan Schwartz will reportedly replace the embattled CEO, and investors applaud the news

After a tumultuous year in which his company was battered by billions of dollars in mortgage-related losses, Bear Stearns' (BSC) chief executive is reportedly stepping down.

The Wall Street Journal reported on Jan. 8 that CEO James Cayne is resigning and will be replaced by President Alan Schwartz . Calls to the company for comment were not returned.

Shares of Bear Stearns rose $1.98, or 2.6%, to $78.23 in premarket trading on Jan. 8.

"We applaud the move to separate the two posts and believe it will result in better risk oversight," wrote Standard & Poor's equity analyst Matthew Albrecht in a Jan. 8 note. "But we think a number of risks remain, including recent losses that have likely caused reputational harm." Albrecht cut his target price on Bear Stearns by $17 to $85, but maintained his hold opinion on the stock.

"Right Choice"

Punk Ziegel analyst Richard Bove said Schwartz is "the right choice for new CEO" because of his background in institutional sales and investment banking, and not in the mortgage and fixed-income trading that has caused Bear Stearns so many problems over the past six months.

In July, Bear Stearns had two hedge funds worth billions of dollars collapse on bad bets in the mortgage market. As mortgage defaults have risen, the bank has been forced to write down the value of bonds and debt backed by the troubled loans.

Under Cayne's watch, "the firm focused its efforts too heavily on the mortgage and credit derivatives markets," Bove wrote in a research note. "Moreover, it apparently never had an adequate risk management system in place."

Bove cut his price target to $67 from $94. He also trimmed his fiscal 2008 earnings estimate to $6.59 per share from $7.96 per share.

Legal Woes

In addition to its financial headaches, Bear Stearns also faces some legal challenges. The Securities & Exchange Commission and the U.S. Attorney's office in Brooklyn are looking into an allegation that at least one Bear Stearns insider associated with the collapsed funds may have been pulling his personal money out of the investment vehicles this spring when the market was in turmoil. The alleged redemptions occurred, according to BusinessWeek sources, during a time the funds' managers were urging other investors to stay put.

Cayne is reportedly staying on as chairman of the board of directors, which Bove said is a mistake since he was in charge of the company as it faltered during the second half of 2007.

Bear Stearns' stock has been hammered as the company deals with the fallout of the weakening mortgage market. Since July 1, shares of Bear Stearns declined 47%. Shares of Bear Stearns have already fallen 14% since the beginning of the year.