Bear Stearns Shareholders Sacrificed for the Economy

So Bear Stearns (BSC) had a book value of $80 per share? It might be a fraction of that. Either way, fortunately for BSC shareholders, they’ll end up with at least SOMETHING as the company enters a lengthy and detailed bankruptcy process, right?

Wrong. In the words of Treasury Secretary Paulson yesterday, “we felt it was very important that this be resolved as a way to minimize impact on our economy.” So Bear shareholders can rest easy that it’s got less to do with the value of the business, and more about preserving the financial system, preventing runs on other banks, and protecting other banks’ book values.

I understand the fact that perception became more important than reality in this case (especially as firms are so reliant on short term financing), but if I were a BSC shareholder I’d rather take my chances with liquidation (and the faint hope of something left over for common equity holders) than accept a take-under at this level.

One scenario is that Bear’s board of directors knows that 30% of the common shares are held by Bear employees, and in a bankruptcy filing they’d fare much worse than in this scenario, in which the risk for JPMorgan (JPM) is so low that they can offer better job-security promises than Bear employees would see in bankruptcy.

$250m for a business which JPMorgan said in its presentation slides will eventually produce $1b in earnings. Now that’s a great PE! And you gotta think the estimate of $6 billion in “transaction-related costs” that JPMorgan is citing will prove to be inflated, but at least they’re trying to make their bid seem slightly more respectable.

If it turns out that shareholders would not have fared better in liquidation, fine. But what blows me away is the possibility that BSC common equity is being (basically) scrapped to calm the financial markets, and that’s wrong. Hopefully the BSC board will fill in its shareholders on why this transaction was in their best interest.

Disclosure: none

Comments

[CaliforniaCato:]

Sounds a lot like the government seizures of S&Ls about 20 years ago. While it made sense with the very worst firms, they even took over the solvent ones and, in true government style, made them insolvent. Like today, those well-connected with the administration got the assets at "bargain" prices and made out unconscionably well. The less connected got hosed. So, what is new?

2008 Mar 18 04:38 AM

[zhandax:]

They seized the 9-month old thrift I was working for in 1985 and made at least $10mm on the deal which we had targeted to add to our net worth. It was merged with some BFE shop and both were later taken over by Glendale Federal which got Glendale into Florida and was eventually absorbed by Citigroup.

The Fed GAVE Bear to JPM. How can you resist this deal...."You can buy it for $236mm; the building alone is worth $280mm, they made almost that much in earnings last year, and we'll throw in the net $11B bond portfolio for free and guarantee you against the worst $30B of crap?"

2008 Mar 18 05:18 AM

[Britishsteel:]

and J P morgan does it again they did in 1928 and now in 2008. The federal reserve guarentees the 30 billion of toxic crap with OUR money!
Did anyone ask America how it feels about this? Is anyone high up going to be prosecuted for causing another Enron? Where are the police?When are all Americans going to start pounding on their congressman's doors and demanding that someonne pays for restroying the Amercian dream for all Bear sharehgolders and their employees. Mr. Barney Franks is in charge of the Banking commision is he responsible? Ben Bernake in charge of the Federal Reserve Is he responsible? The Ceo of Bear Sterns is He responsible? Bear Sterns mouth ppieces said all week nothing was wrong with bear sterns they were lying and we all know it! And any onewho represented them in their confrence calls and spoke for them should also be prosecuted . And By the way Jim Cramer look at him on you tube the man is a JOKE ? Cnbc ? Its all criminal Our government is socializing the risk and privatizing the profits. Mr. khadafy was right last week our government is becoming just like his SOCIALIST.

2008 Mar 18 07:57 AM

[mytwocents:]

Great post Britishsteel

2008 Mar 18 08:26 AM

[Britishsteel:]

Thank you My two cents Now please pound the doors down of congress and be relentless our very way of life demands it! For us, our children and our future generations.

2008 Mar 18 08:37 AM

[Britishsteel:]

I am sorry but heres another thought too which I posted on another article on this blog:

the problem is people are herded into this market on the premise of an investment and to make retirement money for themselves. And they are fooled into thinking stocks never go down only up. They are charged fees for their 401K's and the dealers who manage them use the portfolios as leverage to trade for themselves and as long as they match the indexes they mimic they get the fee's, charged to clients and bonuses and they get to leverage the money to make money for themselves so who actually wins? Is the public made aware of this ? NO! Are these funds sold with this disclosure NO!
Mom and pop are not traders but the broker/dealers are .
Wake up America , Be APATHETIC NO LONGER!

2008 Mar 18 08:41 AM

[the final h...:]

Great thoughts, Britishsteel. Alas, there is no America left. The constitution is gutted, the lawyer-politicians insulated themselves from reprisal and shareholders are now sacrificial lambs. Interesting, eh?

2008 Mar 18 09:38 PM

[pharma:]

Were Bear Stearns problems so catastrophic? I don't think so.

Everything is looking very fishy:
- Wednesday, BSC CEO said there was no any liquidity problem
- Thursday, the CEO said it was a liquidity problem
- Friday, JPM and Fed inject liquidity into BSC. The BSC liquidity problem is solved? No, BSC declared a run on the bank.

How convenient:
- JPM got all BSC assets for just $235M and Fed took all $30B+ liabilities.
- BSC management gets their $1B is severance payments and bonuses
- Fed create a new entity: Banks can get as much cash as they need and/or want [Why could not Bear Stearns get liquidity from this Fed entity]
- Look at Fed's timing
-- Fed moved against BSC late Sunday
-- Monday, there is a general panic with rumors that Lehman was about to go under...
-- Tuesday, before the market opening, both Lehman and Goldman Saks report there are NO any liquidity or any other problems. Fed knew it!!!

It appears that
- There was no any run on BSC
- Fed needed a "good" excuse to cut interest rates by 1% and engage $-printing presses to max speed and, at the same time, protect American banks from potential foreign takeovers

Conclusion
BSC was just a fall-guy to scare everybody into more rate cuts, printing more money, and selectively bailing out banks including iBanks. [Note that iBanks are not regulated by Feds.]

Mr. and Ms. America were just ripped off big time one more time. Well, Feds don't give much about America, its economy and/or its people.

The great Con game is going on!

PS
I am 100% sure that Bear Stearns affair is not over yet. It will be very messy.

2008 Mar 18 11:03 PM

[bruin532:]

It comes back to the arguments MORAL HAZARD VS GREATER GOOD theory. Case one: Better to have the Fed action than to loose the economy. We see all people through the fed taking action for all people to be rewardwd/protected ie the economy. Case two: Not so in Bear the greater good is being applied but Bear is forced to take the greater pain. The ability to access the discount window was offered to other investment banks like GS but only after the deal was struck. If this same openig had been made only hours earlier Bear would not have gone down and the shareholders pension etc whould not be carrieing the burden pain for the greater good.

2008 Mar 21 08:19 AM