Just to give you an idea of how ridiculous this is:
- BSC traded at $30 a share Friday, and well north of $100 a year ago
- Their building is supposedly worth $1.2bn alone.
- They have a solid asset management business, and a world-leading prime brokerage business, and STILL sold for pennies.
- They were the 5th biggest investment bank in the US
My take: KKR and Flowers (two private equity firms) were apparently interested in the bidding. Why didn't they pay up, and at least get the building for cheap and fire all the employees? Probably because Treasury/the Fed wouldn't let the transaction go through unless the buyer agreed to guarantee all of BSC's trades. Who is big enough to guarantee BSC's trades? Out of the pure investment banks, Goldman is the only one with any sort of financial strength, but they probably don't have the balance sheet to assume all of the trading and litigation risk that comes with taking down Bear. Citi and UBS are crippled, BofA is certainly big enough but is scaling down its investment banking and just bought Countrywide anyway. On Thursday and Friday people were talking about Wachovia being a potential purchaser and a good strategic fit, but who knows if they ever had any real interest. That leaves JPM as the only bidder, and since it was the only bidder, it paid basically nothing.
This crisis is so much bigger than Long Term Capital in 1998. LTCM almost destroyed Lehman. This crisis has destroyed Bear, and Lehman has one foot in the grave again too. Many more losses are yet to come.
Bear Stearns was simultaneously preparing a bankruptcy filing in the event the deal had fallen through
Better 2/share than zero. What's strange...really strange...was just how wildly wrong the market was on Friday. 30/share on a company putting bankruptcy paperwork together. That's scary.
"8:24. Good question about how to reconcile the alleged $80 per share book value and todays $2 per share price. JP Morgan doesn't say it directly, but Bear's liabilities must be severe."
"8:35. Bear Stearns does own it's building, which means JP Morgan is getting a huge piece of midtown real-estate as part of the deal. By our math (which is shaky even when we haven't been drinking all day), that means either the building or the business is worth something like negative $400 million."
The litigation risk is a huge component. There are going to be massive shareholder lawsuits (against both Bear and JPM) coming out of this. And who knows what kind of shady dealings at Bear might come to light during the acquisition? Dimon & Co. had only a weekend to put this deal together -- not nearly enough time to fully inspect Bear's books and to figure out all the risks of the trade. They had to set a price low enough to protect themselves.
Is all this stuff common knowledge amongst big firm traders, or Wall Street folks, or the financial sector at large? Are you just someone who follows the relevant -- and perhaps access non-layman -- information, or are you required to be sharp to know all this?
The Fed is covering us - they just cut interest rates by 25 points to 3.25% and they issued a new lending policy for banks. Not like its going to help in the long run...
The Fed is just delaying the date when the whole financial system crashes... The sad thing is that unlike Japan's financial crisis in the 90's, who's going to bail the US out? China?
It still holds, but it takes time for information to be priced in. Remember the insanity with pets.com, koop.com and the like not so long ago? We're seeing another "Emperor's New Clothes" situation today.
The market will price things appropriately in time but, as the saying goes, the market can stay irrational far longer than you can stay solvent.
If anything, this example clearly shows that 'Efficient Market Hypothesis' doesn't hold water. The economic 'science' establishment clings to it to the point of looking silly because they are ignorant of the latest research in dynamical / complex systems theory.
It's a useful hypothesis to use as an ideal, and just because reality is different from the preconditions of the hypothesis doesn't mean it's silly. Sort of like Newtonian physics.
Also, deviations from situations predicted by EMHhelp identify weaknesses or abnormalities in the real market.
Basically, the 'Efficient Market Hypothesis' and Newtonian physics are both wrong. Markets don't accurately price things to 1/100th of a percent every second thought the day. Stocks go up and down though random chance and bubbles are all too common. A more basic failing of the efficient market hypothesis is the lack of a standard level of risk tolerance. However, as a general rule it is vary hard to significantly beat the market over time and for most real world objects F = M * A.
That's basically why I called it "scary". It's amazing that there was 28 dollars/share worth of missing information in this situation. If that sort of oversight lapse is at all common, we're screwed worse than we can possibly imagine.
I wouldn't call it common, but huge companies make huge mistakes from time to time (recall Enron, Nortel, etc. just a few years ago) and the investors in those companies are the ones who pay the price. In this particular case the "missing information" is worse than you think: BSC shares were at ~$160 less than a year ago with much the same assets now being priced at only $2 per share.
Remember though, the assets haven't disappeared: They still exist and are producing wealth in the economy. None of the included properties are going to evaporate. As with Enron's meltdown, business continues as usual under new ownership, with the old owners now holding significantly lighter wallets.
My family had stock in Montana Power before the decided to become a Fiber company in 2001. the stock price was 70+ and 2 months later it was trading for cents.
$2/share might be what it takes for JPMorgan to guarantee a profit.
I wonder what the real market value is of Bear Stearns is, at $2 a share and a market value in 12 months of $10 a share sounds like a great investment for JPMorgan, and will result in a very strong company in about 1 year. This is definitely something to watch. I wonder what inside efforts were put together on this.
Agreed it's a ridiculous deal when I first heard it. But as outsiders, we don't have info on how much debt BSC has. JPM could very well inherited billions dollar worth of debt from the buy-out.
It's bad alright. JPMorgan bought BSC for half the price MySpace was sold for, and this included a billion dollar building (and only after the Federal Reserve agreed to protect them against certain liabilities).
What are your predictions for the credit/financial markets for the next 5-10? Can sovereign wealth and globalization ease this some until the bad debt is flushed out?
- BSC traded at $30 a share Friday, and well north of $100 a year ago
- Their building is supposedly worth $1.2bn alone.
- They have a solid asset management business, and a world-leading prime brokerage business, and STILL sold for pennies.
- They were the 5th biggest investment bank in the US
My take: KKR and Flowers (two private equity firms) were apparently interested in the bidding. Why didn't they pay up, and at least get the building for cheap and fire all the employees? Probably because Treasury/the Fed wouldn't let the transaction go through unless the buyer agreed to guarantee all of BSC's trades. Who is big enough to guarantee BSC's trades? Out of the pure investment banks, Goldman is the only one with any sort of financial strength, but they probably don't have the balance sheet to assume all of the trading and litigation risk that comes with taking down Bear. Citi and UBS are crippled, BofA is certainly big enough but is scaling down its investment banking and just bought Countrywide anyway. On Thursday and Friday people were talking about Wachovia being a potential purchaser and a good strategic fit, but who knows if they ever had any real interest. That leaves JPM as the only bidder, and since it was the only bidder, it paid basically nothing.
This crisis is so much bigger than Long Term Capital in 1998. LTCM almost destroyed Lehman. This crisis has destroyed Bear, and Lehman has one foot in the grave again too. Many more losses are yet to come.