SEC Company Response from BEAR STEARNS COMPANIES INC (CIK 0000777001) — Dec 20, 2005
BEAR STEARNS COMPANIES INC (CIK 0000777001)
Date: Dec. 20, 2005 · CIK: 0000777001 · Accession: 0000914121-05-002418
AI Filing Summary & Sentiment
Letter
[Letterhead of The Bear Stearns Companies Inc.] December 19, 2005 Mr. John P. Nolan Accounting Branch Chief Division of Corporation Finance United States Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549
Re: The Bear Stearns Companies Inc. Form 10-K filed February 14, 2005 File No. 1-08989
Dear Mr. Nolan:
As previously discussed, relating to the aforementioned filing of The Bear Stearns Companies Inc., enclosed herein please find a copy of our revised securitization disclosures to be included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2005.
If you have any questions or require further information, please do not hesitate to contact me at (212) 272-6631 or Sam Molinaro at (212) 272-4390.
Sincerely,
/s/ Jeffrey M. Farber
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[Letterhead of The Bear Stearns Companies Inc.]
December 19, 2005
Mr. John P. Nolan
Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: The Bear Stearns Companies Inc.
Form 10-K filed February 14, 2005
File No. 1-08989
Dear Mr. Nolan:
As previously discussed, relating to the aforementioned filing of The Bear
Stearns Companies Inc., enclosed herein please find a copy of our revised
securitization disclosures to be included in our Annual Report on Form 10-K for
the fiscal year ended November 30, 2005.
If you have any questions or require further information, please do not hesitate
to contact me at (212) 272-6631 or Sam Molinaro at (212) 272-4390.
Sincerely,
/s/ Jeffrey M. Farber
Jeffrey M. Farber
Controller
<PAGE>
5. Transfers of Financial Assets and Liabilities
Securitizations
The Company is a market leader in mortgage-backed securitization and other
structured financing arrangements. In the normal course of business, the
Company regularly securitizes commercial and residential mortgages,
consumer receivables and other financial assets. Securitization
transactions are generally treated as sales, provided that control has
been relinquished. The resulting gain or loss from the sales is included
in "Principal Transactions" revenues in the Consolidated Statements of
Income. In connection with securitization transactions, the Company
establishes special-purpose entities ("SPEs"), in which transferred
assets, including commercial and residential mortgages, consumer
receivables and other financial assets are sold to an SPE and repackaged
into securities or similar beneficial interests. The majority of the
Company's involvement with SPEs relates to securitization transactions
meeting the definition of QSPEs under the provisions of SFAS No. 140.
Provided it has relinquished control over such assets, the Company
derecognizes financial assets transferred in securitizations and does not
consolidate the financial statements of QSPEs. For SPEs that do not meet
the QSPE criteria, the Company uses the guidance in FIN No. 46 (R) to
determine whether the SPE should be consolidated.
In connection with these securitization activities, the Company may retain
interests in securitized assets in the form of senior or subordinated
securities or as residual interests. Retained interests in securitizations
are generally not held to maturity and typically are sold shortly after
the settlement of a securitization. The weighted average holding period
for retained interest positions in inventory at November 30, 2003 and 2004
was approximately 70 days. These retained interests are included in
"Financial Instruments Owned" in the Consolidated Statements of Financial
Condition and are carried at fair value. Consistent with the valuation of
similar inventory, fair value is determined by broker-dealer price
quotations and internal valuation pricing models that utilize variables
such as yield curves, prepayment speeds, default rates, loss severity,
interest rate volatilities and spreads. The assumptions used for pricing
variables are based on observable transactions in similar securities and
are further verified by external pricing sources, when available.
The Company's securitization activities are detailed below:
<TABLE>
<CAPTION>
Agency Other Other
Mortgage- Mortgage- Asset-
Backed Backed Backed
<S> <C> <C> <C> <C>
(in billions)
Total securitizations
Fiscal 2004 $30.2 $71.9 $3.3
Fiscal 2003 $59.0 $51.3 $5.4
Retained interests
As of November 30, 2004 $ 2.6 $ 1.8 $0.1
As of November 30, 2003 $ 1.8 $ 1.4 $0.2
</TABLE>
The following table summarizes cash flows from securitization trusts
related to securitization transactions during the fiscal years ended
November 30, 2004 and 2003:
<TABLE>
<CAPTION>
Agency Other Other
Mortgage- Mortgage- Asset-
Backed Backed Backed
<S> <C> <C> <C>
(in millions)
Cash flows received from retained interests
Fiscal 2004 $537.2 $199.1 $61.7
Fiscal 2003 $411.2 $165.6 $20.8
Cash flows from servicing
Fiscal 2004 $ 1.0 $ 40.6 N/A
Fiscal 2003 N/A $ 8.8 N/A
</TABLE>
The Company is an active market maker in these securities and therefore
may retain interests in assets it securitizes, predominantly highly rated
or government agency-backed securities. The models employed in the
valuation of retained
<PAGE>
interests use discount rates that are based on the swap curve plus a
spread. Key points on the swap curve at November 30, 2004 were 3.40% for
two-year swaps, 4.77% for 10-year swaps, and ranged from 2.41% to 5.51%.
These models also consider prepayment speeds as well as credit losses.
Credit losses are considered through option-adjusted spreads that also
utilize additional factors such as liquidity and optionality.
Weighted average key economic assumptions used in measuring the fair value
of retained interests in assets the Company securitized at November 30,
2004 were as follows:
<TABLE>
<CAPTION>
Agency Other Other
Mortgage- Mortgage- Asset-
Backed Backed Backed
<S> <C> <C> <C>
Weighted average life (years) 6.15 5.17 1.83
Average prepayment speeds
(annual rate) 7%-40% 0%-58% N/A
Credit losses 0.36% 7.19% 2.24%
</TABLE>
The following hypothetical sensitivity analysis as of November 30, 2004
illustrates the potential adverse change in fair value of these retained
interests due to a specified change in the key valuation assumptions. The
interest rate changes represent a parallel shift in the swap curve. This
shift considers the effect of other variables, including prepayments. The
remaining valuation assumptions are changed independently. Retained
interests in securitizations are generally not held to maturity and
typically are sold shortly after the settlement of a securitization. The
Company considers the current and expected credit profile of the
underlying collateral in determining the fair value and periodically
updates the fair value for changes in credit, interest rate, prepayment
and other pertinent market factors. Actual credit losses on retained
interests have not been significant.
<TABLE>
<CAPTION>
Agency Other Other
Mortgage- Mortgage- Asset-
Backed Backed Backed
<S> <C> <C> <C>
(in millions)
Interest rates
Impact of 50 basis point
adverse change $(43.2) $(44.8) $(0.6)
Impact of 100 basis point
adverse change (92.4) (87.6) (1.2)
Prepayment speeds
Impact of 10% adverse change (0.3) (8.3) N/A
Impact of 20% adverse change (0.4) (15.9) N/A
Credit losses
Impact of 10% adverse change (3.3) (32.7) (0.3)
Impact of 20% adverse change (6.7) (63.5) (0.6)
</TABLE>
In the normal course of business, the Company purchases conforming and
non-conforming, investment grade and non-investment-grade, conventional
fixed-rate and adjustable-rate residential mortgage loans and sells such
loans to investors. In connection with these activities, the Company may
retain mortgage servicing rights ("MSRs") that entitle the Company to a
future stream of cash flows based on the contractual servicing fee. In
addition, the Company may purchase and sell MSRs. At November 30, 2004,
key economic assumptions and the sensitivity of the current fair value of
MSRs to immediate changes in those assumptions were as follows:
<TABLE>
<CAPTION>
Fixed-Rate Prime Adjustable-Rate
Sub-Prime Loans & Alt-A Loans Prime Loans
<S> <C> <C> <C>
(in millions)
Fair value of MSRs $104.3 $54.9 $97.7
Constant prepayment
rate (in CPR) 20%-35% 20%-25% 20%-25%
Impact on fair value of:
5 CPR adverse change $(3.6) $(7.4) $(14.1)
10 CPR adverse change (7.0) (14.9) (24.9)
</TABLE>
<PAGE>
Discount rate 10.0% 10.0% 13.0%
Impact on fair value of:
5% adverse change $(9.6) $(7.0) $(10.4)
10% adverse change (17.3) (11.7) (18.3)
The previous tables should be viewed with caution since the changes in a
single variable generally cannot occur without changes in other variables
or conditions that may counteract or amplify the effect of the changes
outlined in the table. Changes in fair value based on a 10% adverse
variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumptions to the change in fair value is
not usually linear. In addition, the tables do not consider the change in
fair value of hedging positions, which would generally offset the changes
detailed in the tables, nor do they consider any corrective action that
the Company may take in response to changes in these conditions. The
impact of hedges is not presented because hedging positions are
established on a portfolio level and allocating the impact would not be
practicable.
MSRs, which are included in "Other Assets" on the Consolidated Statements
of Financial Condition, are reported at the lower of amortized cost or
market. Amortization is computed based on the principal pay-downs on the
underlying loans over the period of estimated net servicing income. MSRs
are periodically evaluated for impairment based on the fair value of those
rights determined by using market-based models or by discounting
anticipated future net cash flows considering loan prepayment estimates,
interest rates, default rates, servicing costs and other economic factors.
For purposes of impairment evaluation and measurement, the Company
stratifies MSRs by securitizations, which are collateralized by loans with
similar predominant risk characteristics, including loan type,
amortization type (fixed or adjustable), and note rates. The excess of
amortized cost over market value is reflected as a valuation allowance at
balance sheet dates. The Company's MSRs activities for the fiscal years
ended November 30, 2004 and 2003 were as follows:
2004 2003
(in millions)
Balance, beginning of year $108.0 $63.0
Additions 206.4 95.0
Sales -- (13.4)
Amortization (57.1) (30.0)
Valuation allowance (27.1) (6.6)
Balance, end of year $230.2 $108.0
Changes in the MSR valuation allowance for the fiscal years ended November 30,
2004 and 2003 were as follows:
2004 2003
(in millions)
Balance, beginning of year $ (6.6) $ --
Market valuation adjustment (27.1) (6.6)
Balance, end of year $(33.7) $(6.6)
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