Bear Stearns Given Away, Not Sold

Are You Concerned About Leverage Now?

I have been on Wall Street for fifteen years, and fully appreciate how the market will read the "purchase" of Bear Stearns (BSC) for $2 per share is anybody's guess. As a manager of risk, I see the following:

• It is obvious Bear Stearns was bankrupt and could not have continued as a viable entity.
• Rather than have them declare bankruptcy, the Fed engineered a plan to have JPMorgan (JPM) "buy" Bear Sterns for $2 per share. A price of $2 per share means the market was too optimistic in the last 14 months when Bear's stock fell from $169.33 in January 2007 to $30 per share as of Friday's close.
• $2 per share is about 1/40th of Bear Stearn's share price of a month ago (source: Bloomberg) JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. It marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29 (source AP). A price of $2 per share tells you the market greatly underestimated the risk associated with holding leveraged securities backed by mortgages.
• Unfortunately, Bear Stearns is not the only firm to hold large quantities of leveraged securities backed by mortgages.
• Therefore, the market may be greatly overestimating the value of several other firms that hold these leveraged bets backed by questionable collateral.
• Bloomberg reported the $240 million "paid" for Bear is about 1/4 the value of Bear's headquarters in Manhattan. Said another way, Bear's headquarters building, which was included in the sale, is worth four times what JPMorgan paid for the entire firm. That means Bear, as an ongoing entity, was a liability as of Sunday. This is not surprising considering the rush for the exits by customers in the last few weeks and the loss-ridden portfolio of securities on Bear's books. Add the possibility of lawsuits against Bear's actions, and JPMorgan in effect said Bear is a liability in its present form, we will not buy it, but we will take it for $2 per share to help shore up confidence since the Fed has asked us nicely.
• If Bear Sterns went from having a $169 stock in January of 2007 to being virtually worthless today, it makes you wonder what other firms may follow a similar path to insolvency.

Comments

[the final h...:]

Next question: who bails out JPM?

and: can i buy a piece of the BSC HQ at, say, $.0001 a share?

hahahahaha

2008 Mar 17 08:22 AM

[Robert DiAl...:]

No BSC for me. Whew. I guess we just day trade and avoid financials.

2008 Mar 17 10:43 AM

[keneaise:]

When the 4th largest lender fails so dramatically, I can't help believeing that there are many other falling shoes already in the sky on their way down to a crash landing.

2008 Mar 17 10:54 AM

[texasgolfer:]

price does not always equal value, how much was paid for the Mark Maguier baseball, and what is it worth?

2008 Mar 17 11:58 AM

[Tao:]

That was odd. I would have given them $3 a share myself, if I had it!

I thought we just bailed out JP. Where did they get the money?

OK, where are the grownups? Where are the auditors?

I joke, but this is deadly serious. Imagine owning it at $169 a share, then it falling to $2. Kinda like my 401k....

2008 Mar 17 12:31 PM

[nukldrager:]

JPM's ok, they still have $197.6 billion left of the bail out money, to keep I presume, and they are reported as being not seriously exposed to the collateral problems undermining the other potential falling shoes.

2008 Mar 17 12:33 PM

[Ebi:]

Looks like Mad Cow disease (aka BSC) is spreading in the financial market

2008 Mar 17 02:42 PM

[gordon:]

JIM ROGERS:

On why Bear Stearns was bailed out:

" You know the reason they did it this way was because, if Bear Stearns had to declare bankruptcy, you'd realize that Bear Stearns paid out billions of dollars in bonuses in January - six weeks ago. If he let them go into bankruptcy, they all would have had to send back their bonuses.

This is what they're doing, they're doing it so they don't have to give back their bonuses. That's why they didn't put them into bankruptcy. Jamie Dimon has gotten a great deal because the Federal Reserve is paying for it. The Federal Reserve is using taxpayer money to buy a bunch of Bear Stearns traders' Mazeratis."

2008 Mar 17 07:29 PM

[hastingspete:]

No, BSC was saved from bankruptcy because $2.00 is still better than nothing and if BSC failed, it would likely have taken down the Street. Bear is/was a huge player in the correspondent clearing space and the prime brokerage space. Bear's failure would have temporarily affected the ability of hundreds of firms to trade, since as clearing broker, Bear was the financial counterparty and guarantor to all its clearing firms. Without Bear, no trading for those firms would have happened until those firms moved elsewhere (a length process in a normal environment). Between the absence of the client brokerage firms and hedge funds, this would have removed quite a bit of liquidity from the market, resulting in a market crash. Furthermore, Bear is on the other side of a heck of a lot of CDS swaps. Without their presence, that market would promptly collapse as well. None of this would have been Good. Ergo, the emergency takeover.

2008 Mar 18 02:45 PM