Nov. 14 (Bloomberg) -- Bear Stearns Cos. reduced its subprime holdings by more than 50 percent in the past two months and said writedowns in the fourth quarter will be $1.2 billion, less than some analysts had expected.

Bear Stearns, the second-biggest underwriter of mortgage bonds in the U.S., rose after Chief Financial Officer Sam Molinaro reported the writedown in an investor conference in New York today. David Hendler of CreditSights Inc. had estimated that the company would be forced to take a $3.2 billion charge.

Earnings at New York-based Bear Stearns dropped 61 percent in the third quarter, the biggest earnings decline in more than a decade, as the erosion of the market for securities linked to subprime mortgages led to a global credit-market contraction. The company, under Chief Executive Officer James ``Jimmy'' Cayne, has cut 900 jobs, or about 6 percent of its workforce. The shares have declined on concern more losses were forthcoming.

``This is a breath of fresh air,'' said Peter Goldman, who manages about $500 million, including shares of Bear Stearns, at Chicago Asset Management. ``We didn't have a clear picture of their exposures. Now we do, and it's much smaller than that of its peers.''

While the past two months have been ``very challenging,'' Bear Stearns has reduced its holdings of collateralized debt obligations, the securities hardest hit in the collapse of the subprime mortgage market, as well as its high-risk home loans and bonds, Molinaro said at the investor conference in New York hosted by Merrill Lynch & Co.

Cutting Back on CDOs

Bear Stearns shares rose $2.58, or 2.6 percent, to $103.45 in New York Stock Exchange composite trading. They surged as high as $111.01 earlier today.

Creditsights analyst Hendler estimated that Bear Stearns would have to take a writedown in the fourth quarter related to its CDOs, which are backed by bonds and loans, including mortgages.

``A potential writedown could impact Bear Stearns the most'' among the largest brokers, Hendler wrote in a Nov. 5 report.

Moody's Investors Service today said it may cut the A1 long- term ratings of Bear Stearns. Approximately $87.3 billion of debt securities are affected. The Prime-1 short-term rating was affirmed. The earnings outlook for the firm's businesses will also be assessed, Moody's said in a statement.

`Tough Markets'

``Bear's performance through the market inflection and dislocation has been more challenged than at some competitors, and reflects not only tough markets, but certain risk and strategic decisions made by the firm,'' Blaine Frantz, Moody's senior vice president, said in the statement. ``This includes the decision to extend financing to one of its in-house structured products hedge funds, which increased Bear's on-balance sheet exposure to these problematic assets and ultimately contributed to the writedowns.''

The biggest charges taken by Bear Stearns and its competitors so far have been for CDOs, followed by mortgage- backed securities that feed into them. Bear Stearns was the 10th largest underwriter of asset-backed CDOs last year, with $9.4 billion, according to Dealogic data.

Merrill, which topped the rankings, underwrote $46 billion last year, followed by Citigroup with $21.3 billion. Merrill said last month it had cut its CDO holdings by more than half to $15 billion. Citi said it had $43 billion of CDOs.

Prime Brokerage

Molinaro said today that Bear Stearns reduced its CDO holdings to $884 million as of Nov. 9 from $2.07 billion at the end of August.

Bear Stearns shares, which have dropped 38 percent this year, are the second-worst performer among the five biggest Wall Street banks, behind Merrill Lynch. While Bear Stearns had much smaller subprime losses than rivals like Merrill in the third quarter, investors are concerned that it's too reliant on the U.S. mortgage market for future earnings.

Bear Stearns is regaining hedge fund customers that defected amid the credit rout in the third quarter, Molinaro said.

Hedge fund balances are ``coming back'' to the firm's prime brokerage unit, and have steadied in the current quarter, he said. The business is ``on pace for a record year.''

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: November 14, 2007 18:09 EST