Moody’s Investors Service on Thursday downgraded the long term ratings of Bear Stearns Cos. from ‘A2’ to ‘A1,’ reacting to the Wall Street bank’s first-ever quarterly loss. The downgrades affected $80 billion of the company’s debt securities, Moody’s said. Bear Stearns said earlier on Thursday that mortgage woes drove a $854 million loss during its fiscal fourth quarter ended November 30. The fourth quarter loss was driven by $1.9 billion in writedowns associated with its mortgage and CDO portfolios. “These write-downs overwhelmed the earnings power of Bear’s otherwise strong, but less well-diversified franchise,” said Blaine Frantz, a Moody’s senior vice president. Although these losses occurred during a market inflection point, Moody’s said that their size relative to Bear’s earnings indicated “an increase in the firm’s risk appetite.” The rating agency also expressed concern over Bear’s commercial real estate portfolio:

Moody’s believes that Bear is exposed to risks in its commercial real estate portfolio. Moody’s particularly noted Bear’s concentrated risk from its participation in the $26 billion Hilton leveraged buyout transaction. This exposure is also large relative to the firm’s earnings capacity and capital position and is another example of an elevated risk appetite at the firm.

While further writedowns in residential mortgages were characterized by Moody’s as a “limited” possibility, the firm’s Alt-A portfolio management was singled out as a potential trouble spot in the quarters ahead. So, too, was an expectation of generally challenging conditions in 2008. For more information, visit http://www.moodys.com.