Sept. 27 (Bloomberg) -- Bear Stearns Cos. may be close to selling a stake to Warren Buffett or a financial institution as the beleaguered securities firm struggles to revive earnings and its stock price.

Buffett, the 77-year-old billionaire chairman of Berkshire Hathaway Inc., contacted Bear Stearns Chief Executive Officer James ``Jimmy'' Cayne a month ago, the New York Times reported yesterday, citing unidentified people. Other potential investors are Bank of America Corp., Wachovia Corp., and China-based Citic Group and China Construction Bank Corp., the Times said. Bear Stearns fell $1.85 to $121.15 at 4:17 p.m. on the New York Stock Exchange, after gaining 7.7 percent yesterday.

The talks may signal that Bear Stearns, the fifth-biggest U.S. securities firm, needs cash after mortgage-related losses led to its biggest drop in quarterly earnings in more than a decade. By partnering with a larger U.S. or Chinese bank, New York-based Bear Stearns could become more competitive in international markets, where it trails rivals including Goldman Sachs Group Inc. and Morgan Stanley.

An investment by Buffett could be ``great'' because it ``puts his reputation behind Bear and strengthens it,'' said Erin Archer, an analyst at Thrivent Financial for Lutherans in Minneapolis, which manages $75 billion and holds Bear Stearns shares. ``It could bolster the balance sheet and perception'' of the firm.

No Comment

Officials at Bear Stearns, Berkshire Hathaway, Bank of America and Wachovia declined to comment. An official at Citic couldn't be immediately reached.

Yu Baoyue, a Beijing-based spokesman at China Construction Bank, said ``nothing has changed'' since Chairman Guo Shuqing's comments on Aug. 27 in response to a question about buying a stake in Bear Stearns.

``For overseas acquisitions, we will focus on commercial banking for now and normally won't consider buying stakes in the big investment banks,'' Guo said then.

Speculation that Bear Stearns may sell a stake has persisted for more than a month. Richard Bove, a Punk Ziegel & Co. analyst in Lutz, Florida, said Aug. 16 that Cayne, 73, might sell as much as 20 percent of the firm to an investor such as a Chinese bank.

China Construction Bank is the nation's second-largest bank by assets. Its shares rose 32 percent on Sept. 25, their first day of trading in Shanghai. Citic Group's Citic Securities Co. is the world's fastest-growing brokerage, with a market capitalization of about $40.7 billion, more than Bear Stearns and Lehman Brothers.

Buffett's Interest

Billionaire Joseph Lewis, the British-born, Bahamas-based currency trader, paid $860 million for a 7 percent stake in Bear Stearns before the company reported a 61 percent decline in third-quarter earnings. Bear Stearns shares fell to a two-year low of $103.15 on Aug. 15, and closed up $8.76 at $123 in New York Stock Exchange composite trading yesterday.

Buffett contacted Cayne last month when the stock approached $100, the Times reported, adding that Bear Stearns executives are no longer insisting that a buyer pay a 40 percent premium for a stake in the company. Buffett bought 12 percent of New York-based Salomon Brothers in 1987 to protect the securities firm against a takeover by corporate raider Ronald O. Perelman. Salomon was sold in 1997 to what is now Citigroup Inc., the biggest U.S. bank.

``It's a good thing any time Warren Buffett buys a piece of a company or is thinking of it,'' said Joseph Saluzzi, co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. ``You can't go wrong with a guy like that behind you.''

Swaps Decline

Credit-default swaps on Bear Stearns fell 15 basis points yesterday to 75 basis points, according to Phoenix Partners Group in New York, signaling an improving perception of credit quality. The five-year contracts dropped to 70 basis points earlier in the day, the lowest in two months. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Bear Stearns's stock has declined more than 15 percent since mid-June when two of the firm's hedge funds failed because of bets on mortgage-linked securities, damaging Cayne's reputation for avoiding risk.

Third-quarter earnings fell short of analysts' estimates after fixed-income sales and trading slumped 88 percent amid ``extremely challenging'' market conditions. The collapse of the hedge funds saddled the firm with $200 million of losses. Chief Financial Officer Samuel Molinaro said Sept. 20 that ``the worst is definitely behind us.''

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: September 27, 2007 17:21 EDT