Liquidity Rumours Unleash Bears on Bear Stearns

Rumors of a liquidity crisis at Bear Stearns sent the Wall Street brokerage's shares diving by 14% to a five-year low yesterday, prompting the chairman of its executive committee to hit out at "totally ridiculous" speculation.

Bear Stearns, which employs 14,000 people, has been among the financial institutions worst hit by the sub-prime home loans crisis. It lost more than $1.9bn on mortgage-linked securities last year.

In a sign of a sudden weakening in confidence, the cost of insuring Bear Stearns' debt jumped by 1.5 percentage points to 5.9% during early trading for credit default swaps in New York.

The firm's shares opened at $70.28 and dropped to $60.26 at one point, before recovering to $63.94 by lunchtime on Wall Street. Alan Greenberg, who chairs the bank's executive committee, expressed frustration. "It's ridiculous, totally ridiculous," he told CNBC television. "They're rumors. What can I do about it?"

Traders said there was aggressive demand for "put" options, which give investors the right to sell stock at a specific price in the future. Michael Mainwald, head of equity trading at Lek Securities, told Bloomberg News: "There's an insolvency rumor and concerns on liquidity, that they just have no cash."

In a research note published last month, analysts at stockbroker Fox-Pitt Kelton predicted fresh write-downs of $820m in Bear Stearns' first-quarter results, arising from continuing credit crunch losses.

The collapse of two Bear Stearns hedge funds in June was among the earliest signs of the sub-prime mortgage crisis. Barclays, which lost £200m, is suing Bear Stearns for mismanagement.