Bear Stearns Sold for an Embarrassing $236m

Slice the $236 million JPMorgan (JPM) just agreed to pay for Bear Stearns (BSC) any way you want to and still it's a horrible end for a storied brokerage firm. To end up paying $0.25 on the dollar for the company's $1 in headquarters real estate, in effect, and to do it in equity, no less, is an embarrassment beyond embarrassment for people collectively incapable, at least until now, of being embarrassed.

Tragic, tragic stuff. We can only hope it means a bottom (even one that involves bouncing along for some time), to one of the worst periods in modern financial markets. But trust me, there is nothing in it for anyone to be proud of, other than removing much of the Bear-specific counterparty risk that would have taken everyone in the financial market out in a major way during trading today.

More here on the deal, and JPMorgan's PPT presentation for the conference call is here.

Fed Declares Itself Counterparty to U.S. Financial System

The Fed is backstopping this meltdown in a major way. With two actions taken late Sunday, the Fed has officially turned the U.S. government into the counterparty to the U.S. financial system by letting securities dealers borrow directly at the discount window.

This is major stuff, folks, and the market will be torn about whether to view it as implying that we're entering a Great Depression style breakdown of financial markets, or that the Fed is finally drawing a line and stopping the credit carnage right here.

For my part, I credit the Fed for moving, however belatedly, beyond cutting the discount rate. That said, however, it is hard not worry that it's too late, and the damage has already been done, and more is underway with massive deleveraging and contraction of global credit markets.

Quote de Jour on Bear Stearns

I'm sure I'll be adding to this extensively over the next 24 hours, but so far my favorite quote on Bears Stearns being bought for a tenth of what it sold for a week ago, and 1.25% of what it sold for a year ago, comes from the usually more savvy Andrew Ross Sorkin at the NYT:

The cut-rate price reflects deep misgivings about the firm’s prospects.

Gee Andrew, you think?

Comments

[Lisa:]

Does this mean that JPM is a buy? Perhaps the companies that aren't exposed to the debt melt-down will come out competitively far stronger.

2008 Mar 17 03:10 AM

[TM:]

I do think this is going to lead to some great buys in the sector. I am going to start taking a look at some Citi long dated calls. At first glance they look pretty cheap, and I think this week will only get cheaper.

2008 Mar 17 03:18 AM

[ChaulmoograOil:]

The Bear Stearns buyout may have the effect of valuing other, similar mortgage-related enterprises at the "$2 equivalent" fraction of their capitalization as of week ago, as another thread points out. A real downdraft, if so.

This may be only a minor prelude to a much more serious and panicky credit crunch, which will happen if there are simultaneous, correlated attempts to unwind a substantial portion of the "credit default swaps" market. The swaps market (a kind of derivatives) has nominal size in the trillions. When Berkshire Hathaway bought General Re a few years ago, and tried to unwind its portfolio of derivatives -- i.e., to back out and sell them -- it had to take enormous losses, partly from counterparty failures and their side-effects, I believe. Swaps have been considered great risk-spreaders because any counterparty failures would be uncorrelated. But when the mood changes worldwide to fear and investing conservatism, things once-uncorrelated can get correlated fast.

I don't know what percent of the General Re derivatives assets had to be written off.

If this credit crunch keeps spreading, watch out for a coming "swaps crisis".

2008 Mar 17 03:32 AM

[Egg:]

It definitely means the bottom for Bear Stearns, but now the new problem that it opened is what's going to happen to LEH now. Or MER. Or C. Not GS (Helicopter Ben's fleet would literally be in service before they are at risk.)

Can people who own LEH currently truely be confident that their stock will not wind up with a similar fate?

2008 Mar 17 03:55 AM

[sammyg123:]

This is a step in the right direction. Now, BSC's assets can be liquidated, and those funds can be used to pay BSC's counterparty risk. The great unwinding has begun, and this is the only way we are going to get to the bottom. There is a huge bubble in the bond markets, corporate, and treasuries. This bubble can't pop until the credit markets unfreeze. The credit markets can unfreeze once these counterparty risks are unwound. The unwinding has begun, and we can only hope that JPM knows BSC's book to the point that they can unwind BSC and liquidate it quickly. We can only hope.

Anyway, Pig Bear Stearns deserves it's embarrassingly low place in financial history. It is a firm that has been riddled with criminality since the beginning. Perhaps one thinks that they aren't "necessarily criminals." However, clearly, they have operated outside of ethics, which means they are....criminals. Even if they didn't break securities laws, they certainly screwed their customers and shareholders.

They have gotten their just deserves. Justice isn't pretty sometimes, and we are all paying the price for what they, other brokerages, banks, and financial entities have created. As these errant financial institutions are destroyed, perhaps we'll be able to build a more stable and effective financial system.

We can only hope.

2008 Mar 17 04:24 AM

[ChaulmoograOil:]

"The credit markets can unfreeze once these counterparty risks are unwound. The unwinding has begun, and we can only hope that JPM knows BSC's book to the point that they can unwind BSC and liquidate it quickly. We can only hope."

Counterparty risks don't get "unwound", only the pyramid of derivatives gets unwound. During this process, counterparty risks either fizzle out (any failures and losses are absorbed by the solvent counterparties) or else they spread like wildfire from party to party, possibly worldwide.

"It is a firm that has been riddled with criminality...
They have gotten their just deserves."

I doubt it, unless you mean multimillion dollar severance packages and bonuses and salaries deserved for their splendid leadership.

2008 Mar 17 05:01 AM

[lance2210:]

If you ask me JP Morgan paid too much, i think Bear Stearns is a bit like Barings after Nick Leeson ran through it. JPM should have paid a symbolic $1 for it all and take the liabilities. Of course having the Fed in your pocket is something we should all aspire too!

2008 Mar 17 06:43 AM

[sammyg123:]

So....counterparty risks unwind after the derivatives mess is cleaned up. gotcha. That's what I said.

2008 Mar 17 07:57 AM

[steveballmer:]

How did I miss that one!

2008 Mar 17 08:23 AM

[Superpositron:]

I cant help but think that this entire complex financial crises is rooted in pure, absolute and epic greed.

2008 Mar 17 08:26 AM

[Nikola:]

This is what we call a collapse of the pyramid scheme, at least the one at Bear Stearns.

2008 Mar 17 08:26 AM

[Fro:]

FYI, they have not sold yet - even though the Fed backstop makes this a good deal for JPM in terms of managing the assets at $2/share, shareholders should opt for bankruptcy, as the downside is only marginally worse and may produce some breakup value

2008 Mar 17 09:00 AM

[Dan Jacome:]

LEH - 20% at open, could bounce later this week; at least Fuld doesn't leave conf calls to play the back 9.

2008 Mar 17 09:53 AM