Dec. 20 (Bloomberg) -- Bear Stearns Cos., the securities firm that helped trigger the collapse of the subprime market, reported its first-ever loss after writedowns for mortgage holdings and declines in trading and investment banking.

The fourth-quarter loss of $854 million, or $6.90 a share, was almost four times wider than the average estimate of analysts surveyed by Bloomberg. Moody's Investors Service cut the firm's credit rating one level to A2, the lowest since 2003. Bear Stearns, which has fallen almost 44 percent this year in New York Stock Exchange trading, rose 0.9 percent today.

Chief Executive Officer James ``Jimmy'' Cayne and senior managers will forgo bonuses for the year after producing ``unacceptable results,'' he said today in a statement. The $1.9 billion writedown wiped out the New York-based company's revenue for the three months ended Nov. 30. Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc. posted gains for the quarter from trading stocks and advising on mergers.

``We had weak trading results in a number of businesses, and the size of our fee-based businesses aren't large enough to offset that,'' Bear Stearns Chief Financial Officer Sam Molinaro said today in a conference call with analysts.

Return on equity dropped to 1.8 percent for the year from 19 percent in 2006. Morgan Stanley reported a 7.8 percent return; Lehman generated 21 percent. Goldman Sachs delivered 33 percent for the year.

Bear Stearns has ``a myriad of problems,'' said Tom Jalics, an analyst at National City Bank in Cleveland, who helps manage $34 billion, including Bear Stearns shares. ``They're not as diversified, they don't have a big overseas presence, big investment banking or equities presence.''

`Disconcerting'

The firm gained 82 cents to $91.42 at 4:17 p.m. in NYSE trading, after falling as much as $2.65 earlier today.

The company's writedown, while smaller than at Citigroup Inc., Morgan Stanley and Merrill Lynch & Co., adds to the more than $80 billion of charges reported by the biggest banks and securities firms since surging defaults on U.S. subprime mortgages prompted investors to shun related debt.

Bear Stearns's writedown was ``less disconcerting than what looks like a loss of franchise/business,'' Credit Suisse Group analyst Susan Katzke wrote today in a report to investors. Katzke, who has an ``outperform'' rating on the stock, reduced her 2008 earnings estimate to $7.50 from $11.

``I don't think the results that you saw for the quarter across those businesses are any indication of our inability to compete,'' CFO Molinaro said during the conference call. He predicted that revenue will be ``significantly higher'' next year.

$400 Million Erased

In a separate interview today, Molinaro said it was impossible to be certain that the worst of the market troubles were over.

Bear Stearns spurred this year's crash in the market for home loans to people with poor credit when two of its hedge funds, which invested in securities tied to the mortgages, collapsed in July. About 30 percent of the firm's fixed-income revenue comes from mortgages and related securities, according to estimates from Sanford C. Bernstein & Co. analyst Brad Hintz.

The mortgage writedown erased $400 million of revenue from debt sales and trading in the fourth quarter. Even before the charge, the results were down 64 percent from the same period last year.

Lehman, the No. 1 underwriter of mortgage-backed bonds this year, reported $860 million of fixed-income revenue in the fourth quarter, after an $830 million writedown. Half of Lehman's 2007 revenue came from outside the U.S. Bear Stearns has yet to derive more than 20 percent from other regions.

Succession Plan

Cayne struck an agreement in October with China's government-controlled Citic Securities Co., Asia's biggest brokerage by market value. Bear Stearns sold Citic a six percent stake for $1 billion and promised to invest the same amount in the Beijing-based company.

``They need to find leadership and more financing from the outside,'' said Andrew Corn, CEO of New York-based Clear Asset Management, which sold its Bear Stearns shares in September. ``The board will come under pressure to replace Cayne. The firm's reputation is tarnished, and they're losing clients.''

Bear Stearns closed the two hedge funds that blew up and Cayne ousted his co-president, Warren Spector, whom investors considered the heir-apparent. The share price has suffered in part because there's no clear succession plan for the 73-year- old Cayne, said National City's Jalics.

Molinaro, in today's conference call with analysts, declined to answer questions about the firm's leadership.

Hedge Fund Customers

Goldman, the largest securities firm by market value, reported record fourth-quarter earnings of $3.22 billion. Morgan Stanley, the second-biggest, reported a loss of $3.56 billion yesterday, its first since going public in 1986. Merrill Lynch, the third-largest, publishes results next month. All the firms are based in New York.

Bear Stearns, the fifth-largest securities firm, said fourth-quarter revenue from equity sales and trading dropped 11 percent to $384 million. The decline stemmed from losses on equity derivatives bets, Molinaro said in the interview.

Clearing revenue, which includes fees for providing brokerage services to hedge funds, rose 2 percent to $276 million. Margin debt balances, which reflect the level of hedge fund customer activity, were unchanged at $85.2 billion, after declining by 21 percent in the third quarter.

The flight of prime brokerage clients in the third quarter, when the Bear Stearns funds failed, ceased during the fourth quarter when some hedge fund customers returned, Molinaro said.

Recession Benefit?

Investment-banking fees during the quarter fell 44 percent to $205 million. Bear Stearns advised on $47 billion of takeovers in the quarter, triple the amount a year earlier, data compiled by Bloomberg show. The firm underwrote $7.3 billion of U.S. bonds, 17 percent less than last year. It managed $1.18 billion of equity offerings, a 28 percent decrease.

Bond shops like Bear Stearns would benefit from a possible a U.S. recession next year, Sanford Bernstein's Hintz said. During a recession, traditional investment banking activities such as mergers slow down to a halt, while interest rate cuts by central banks boost the price of bonds.

Because Bear Stearns relies less on investment banking and more on fixed income trading, it could profit from an economic contraction, Hintz said.

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

Last Updated: December 20, 2007 17:46 EST