Lifeline for Bear Stearns marks shift for central bank

Wall Street and shareholders, including Massachusetts pension fund, see stakes plummet

The emergency takeover of Bear Stearns Cos. shook the investment world yesterday, as money managers who owned the once-venerable firm's stock counted their losses and others braced for additional fallout.

The Massachusetts state pension fund's stake in Bear Stearns was valued at $24 million last week, through its holdings in the Legg Mason Value Trust. Now, it's worth a fraction of that.

The Legg Mason fund, managed by the famous value investor Bill Miller, is one of the largest holders of Bear Stearns, with 2.3 million shares at the end of 2007. JPMorgan Chase & Co.'s $236 million deal to acquire Bear Stearns valued the firm's shares at $2 each, down from $70 a week ago, and $30 on Friday. Legg Mason did not comment in detail on the pension fund's holdings.

The state pension fund, like most large investors yesterday, also declined to comment on potential losses. An official of the $51.7 billion pension fund said a number of hedge funds the state invests in were also assessing any possible losses related to Bear Stearns and were expected to report back today.

Investors were clearly worried in other quarters. In response to customer inquiries, BlackRock Inc., a New York investment giant that manages $1.4 trillion for large investors and in mutual funds, yesterday twice e-mailed clients to try to quell concerns that the firm had exposure to Bear Stearns. The firm took the unusual step of stating specifically that it does not have "any direct exposure to Bear Stearns" in any of its money market funds. It did not mention its other mutual funds or investments by name.

The second e-mail, sent in the afternoon, said the firm in recent weeks had brought together resources from across BlackRock, which has a large Boston office, to assess any risks. In an interview, BlackRock vice chairman Barbara Novick said, "We're in an unprecedented situation in the markets overall. We're very closely monitoring all of our exposures. I wouldn't single out one firm."

Bear Stearns services large institutions and wealthy individuals through its brokerage force, trading desk, and large securities-clearing operation. It has also been a broker to hedge funds.

Hedge fund managers and mutual fund firms were closely watching another major Wall Street firm, Lehman Brothers Holdings Inc., yesterday. The firm is expected to release bad news about its own exposure to the subprime credit crisis along with its earnings today, and its shares plummeted, ending the day down 21 percent, at $31.02.

Losing another major trading firm would likely harm the ability of investment managers to trade with ease and at the best prices, mangers said.

It was unclear whether the Federal Reserve would rush in to help yet another Wall Street broker, although some hedge fund managers were counting on that, if necessary, to calm the markets.

At Bear Stearns's Boston office, which employs about 200 people, there was both distress and relief yesterday, according to a longtime senior broker. Employees left work Friday knowing the firm was in dire straits; the JPMorgan offer meant clients' money was safe and they still had jobs - for now. The broker said people were worried about their jobs - the deal could mean thousands of jobs lost across the company, by some estimates. And employees, many of whom own shares in the firm, stand to lose millions of dollars.

"It's painful," the broker said, speaking on condition of anonymity because of the sensitivity around the deal. But merging with JPMorgan, he said, was "the best of all the possible outcomes," for the company's clients and for the global markets.

State Street Corp. was Bear Stearns's eighth-largest holder at the end of last year, with 3.6 million shares. Fidelity Investments held 2.3 million shares at year-end. Putnam Investments slashed its holdings by two-thirds, selling 4.4 million shares and holding 2.2 million at Dec. 31. All three firms declined to comment.

Hedge funds have walked away from Bear Stearns in droves in recent weeks, and the outpouring of assets and business is part of what led to Friday's crisis. Investors yesterday indicated that JPMorgan may have gotten a deal on the fifth-largest Wall Street firm: Bear Stearns shares closed at $4.81, more than double what JPMorgan is offering. JPMorgan shares rose 10.3 percent - which is unusual in a takeover - to $40.31.

Beth Healy can be reached at bhealy@globe.com.