Bear Stearns (BSC) collapsed so fast I was unable to draft a blog post about it, due to my current round of computer issues and the speed at which the situation unfolded. My initial post was going to be around how bad things must be if the Sovereign Wealth Funds were unwilling to inject cash into BSC, next was to discuss the potential buyout by J.P. Morgan (JPM). Now, nothing left to do but to play a round of taps for Bear Stearns and discuss what really happened today:
The Deal of The Century
By purchasing Bear Stearns for $2/share and having the Fed come in and guarantee the risk, J.P. Morgan has engineered the deal of the century. Buying a troubled company for pennies on the dollar (effectively getting the business units of value for free) and having a 3rd party shoulder the risk from the acquisition target’s riskiest assets, sounds like a great way to do business. In fact it’s possible that BSC could’ve been liquidated for more at a bankruptcy auction, especially if market fears calmed down or the Fed provided some support in the form of asset guarantees.
It’s important to remember that BSC wasn’t a business experiencing top to bottom failures across all of its business units, instead its losses from subprime created a “negative halo effect” resulting in liquidity problems and customers unwilling to do business with the company. In other words, JPM is getting various BSC units practically for nothing and should have no problems seeing immediate returns from the integration of their energy trading, risk arbitrage and prime brokerage units.
Benjamin Graham defined a solid margin of safety as purchasing a stock at a 33% discount to fair value, and 33% looks pedestrian in comparison to the stratospheric margin of safety that JPM is getting on this deal. The margin of safety that comes from getting a business nearly for free coupled with the government shouldering the risk, is truly hard to beat. Over the long-term, J.P. Morgan’s return form this deal could monstrous. Even if the returns aren’t tremendous, there isn’t much downside when you buy a company for relatively nothing.
Thinking about the big picture, this deal is just another sign of a Fed willing to do almost anything to prop up the financial markets and keep certain companies from failing. The concept of “free markets” and “failure” have been thrown out the window, and replaced with the idea that failing companies are simply being oppressed by a fiendish market and need to be saved by the Federal Government.
Bear Sterns is the American Northern Rock (NHRKF.PK). Only this time around, the Fed was slightly cleverer than our cousins across the pond, instead of nationalizing the broker they asked J.P. Morgan to “buy” the company and then guaranteed much of the risk. For all intents and purposes it’s the same bloody thing as a taxpayer funded nationalization, as the Fed is assuming the risk for funding BSC’s “illiquid assets”.
This won’t be the last taxpayer funded bailout we see prior to the end of this current fiscal crisis, and arguably it hints of much larger problems if the government is willing to take such extreme measures.
Disclosure: At the time of publishing the author didn’t own a position in any of the companies mentioned in this article.
