Brokerage Stocks Nosedive on Bear Stearns Fallout

Everyone seems to have mixed opinions on whether or not JPMorgan Chase (JPM) (40.31 0.00 0.00%) got a good deal by paying only $2 a share for 85-year-old Bear Stearns (BSC) (4.81 0.00 0.00%). This valuation is at just 6% of its market value last Friday and a huge drop from its record share price of over $172 last year. Some say that it was a huge steal for JPMorgan, as it got help from the Fed, while others say the assets owned by Bear won’t cover its liabilities.

Not only will the shareholders suffer from the sellout to JPMorgan, Bear Stearns employees will suffer too. JPMorgan expects to cut about half of Bear’s 14,000 employees and seems only interested in the prime brokerage, securities clearing and equity trading businesses of Bear. This is a double whammy for employees, who are already losing out from the Bear shares they were paid in as the company was nearly 30% owned by its staff.

Another floundering investment bank is Lehman Brothers (LEH) (31.75 0.00 0.00%), which has higher exposure to mortgages and mortgage-backed accounts than Bear Stearns. Earlier yesterday, there was a rumor circulating that Singapore-based DBS Group was no longer trading with Lehman as they were afraid the trades weren’t going to be settled. Lehman said that wasn’t true in the following statement:

“We are doing business with DBS… They continue to deal with us and we just executed a NZ$20 million kiwi FX trade with them,” Lehman spokesman Matthew Russell said in response to queries from Reuters. “It’s business as usual.”

Anyone who’s traded FX will find this rather comical: NZ$20m is a tiny transaction. In fact, it’s so small that many individual traders trade that volume. The risk to DBS would only be in the thousands of dollars. So for Lehman to be using that one tiny trade as an example that all is well, is a bit like Bear Stearns saying they had plenty of capital just three days before their astonishing collapse.

Brokers in Trouble

MF Global (MF) (6.05 0.00 0.00%), a major broker of exchange-traded futures and options known for having taken over much of the failed Refco, is now having its shares severely battered by the market with shares falling over 60% on Monday. This is a few weeks after it disclosed that an employee made unauthorized trades leading to a loss of $145 million. MF Global issued a statement Monday that its operations were strong and that it held no mortgage-backed securities But as can be seen though, the market wasn’t impressed at all.

Other option trading outfits, like Interactive Brokers (IBKR) (25.37 -4.35 -14.64%) and GFI Group (GFIG) (51.01 -14.11 -21.67%) were under pressure on Monday as well.

Comments

[Sahappyc:]

Apparently the author of the article has not done enough research to understand that this deal is not done. 1) The Bear Shareholders have to approve this, of which a British Billionaire who owns 10% says he doubts it will get done and 2) the Bear Building is worth $2 a share and 3) it was a liquity problem even the JP Morgan staff stated in their shareholder meeting, the books are in good shape, and 4) it appears the book value is somewhere at $40 a share or above. So if you were a share holder would you take $2? NOT

2008 Mar 18 10:10 AM

[Saruman:]

GFI nosedive is a total mystery: the company is awash in cash, does not do trading, it's a pure middleman, supposedly thriving on volatility. Why would Bear collapse threaten it in any manner, why would the whole economic downturn drive its stock from $100 in December to around $33 yesterday? I cannot find any public information to this effect.

2008 Mar 18 08:02 PM