The Bloody Knife Used to Gut Bear Stearns?

In the vein of any good mystery (or conspiracy theory), here are some charts and stats to go with my Bear Stearns (BSC) conspiracy post from a few days ago. Hat tip to Chris Alleva for the heads up.

JP Morgan (JPM) had a credit exposure/capital ratio of 419% as of 12/07. Click here to download the original chart (.pdf warning on link).

The average ratio is 83%; excluding JPM it is 49%. HSBC (HBC) is the only bank with the level of exposure and they have had some of largest writedowns.

But there are more than a few crackpots making this assertion. Professor Solomon from NYU is one of those making the charge.

Specifically, I believe that JP Morgan acquired Bear because they stood to lose the most from a Bear Stearns bankruptcy. For example, as Barry Ritholtz of the Big Picture points out (see here), JP Morgan has the greatest derivative exposure of any of the I-Banks. Now, I do not know how much of that exposure was to Bear Stearns as the counterparty, but I bet it was a fair amount (in fact, see Jesse’s Cafe Americain for information on Bear’s credit derivative exposure).

If Bear were the counterparty (insurer) to JP Morgan on much of its mortgage-backed security portfolio, it then becomes transparent why JP Morgan had to step in. They would have had to step in to avoid a Bear bankruptcy so that they would not be forced to take toxic assets back onto their own balance sheet and avoid massive write-downs. Were JP’s exposure to Bear large enough, then JP Morgan itself could have been left significantly impaired.

This might also explain the Fed’s interest in Bear. For example, if it were only Bear at risk and their exposure was spread relatively evenly across counterparties such that many of the big, primary banks were not at risk as a result, the Fed would have had no interest in this event. Instead, it would have just let Bear fail. But the Fed could not let Bear bring JP Morgan down  with it. So it stepped in to orchestrate an orderly wind-down of Bear while facilitating its acquisition by JP Morgan.

But this still doesn’t explain why JP Morgan ended up with a relatively “cheap” price for Bear. Here is the second part of my theory. Namely, that Bear was into JP Morgan so deep (on the bad side of so many counterparty trades with them), that the Fed effectively negotiated a price that would have made Bear more or less whole on its obligations to JP Morgan. This too could explain why many other suitors dropped out so early in the process - because the Fed was not prepared to offer the same deal to those other “interested” buyers.

Comments

[buyitcheap]

Wow. So the Fed got a two-fer by guaranteeing the Bear's garbage which was actually JPMs? That must've been some very interesting conversation over that weekend. One wonders who was next in that Ponzi chain after JPM.

[Chuck]

I love this Mel Gibson stuff !!! It will be interesting to see who disappears, either from the various boards, companies, government, ad who disappears otherwise.

[helplessobserver]

The final chapter of BSC is a long ways from being written. You don't flush $21B down the drain while large mutual funds and Joe Lewis watches. We taxpayers will foot a big settlement to BSC shareholders.

[User 68127]

R-E-G-G-I-E! R-E-G-G-I-E! R-E-G-G-I-E!

[User 165905]

Reggie, Since you start your article (the one linked to your blog where you quote options expert) on the options issue. Lets start there. You use dates March 11th to 14th. 1) you say no calls were purchased. Its unlikely with the stock, falling from prices $70 to $50 to $30 (13th of March) in two days that anybody would be entering orders to buy or sell calls with $20 strike. As far as puts, you use the unusual total volume for 4 days (11th, 12th, 13th, 14th). If all that volume was n the 11th or 12th, maybe there would be a kernel of truth. But at 30 (on the 13th) that would not be so unusual to see heavy trading volume on options after a 55% collapse in underlying stock
To suggest that this scenario was orchestrated by a few to make money on shorts/puts on a few million shares is ludicrous, you can do better than that when evaluating conspiracy theories. Most of your "theory" focuses on this purported "options play" answer the issue about volume (on the 11th and 12th and). There are much better rumors surrounding why institutions wanted them to go down. You have done better work before

[Ignorantdasgreco]

HAW HAW HAW

[Ignorantdasgreco]

I am new here. HAW HAW HAW

[atauber]

nobody askes why the FED first gave BSC credit for 28 days and then pulled the plug on them WHY???????????????????...

[User 198320]

TYPICALLY ,THIS IS A FRAUD AFER ENRON,ALL BSC INVESTORS ARE DECEIVED BY JPM AND BSC BUY OUT CONSPIRACY,INSTEAD OF BUYING BSC SHARES AT 35,JPM PAYING ONLY 2 BUCKS,YOU CAN'T BELIEVED THAT IT HAPPENED JUST LIKE THE TWIN TOWERS GOT HIT AND COLLAPSED IN 1 DAY,GOD WOULD NOT BLESSDED AMERICA