JPMorgan buys Bear Stearns for $2/sh, ~$236mm total

http://www.nytimes.com/2008/03/16/business/16cnd-bear.html

by ctkrohn • 18 years ago

56 67 18 years ago

nytimes.com

ctkrohn7• 18 years ago

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.

aswanson3• 18 years ago

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?

Frocer• 18 years ago

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.

mynameishere2• 18 years ago

I'm not sure it was that bad:

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.

wallflower2• 18 years ago

From DealBreaker.com's liveblog of tonight's 8PM JPMC conference call (http://tinyurl.com/2jlhjy)

"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."

nickb• 18 years ago

So much for the efficient market hypothesis... http://en.wikipedia.org/wiki/Efficient_market_hypothesis

jorgeortiz85• 18 years ago

The real question the market will be asking tomorrow morning is: are any other major banks on the brink of bankruptcy?

Financials are going to have a wild ride on Monday.

Dauntless• 18 years ago

They lied saying they didn't had any liquidity problems several times last week, until Friday when they said they are fucked. They should go to jail!

jdavid4• 18 years ago

$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.

whacked_new3• 18 years ago

Hey, good to read your posts again, informative as before; thanks!!

cstejerean• 18 years ago

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).

jakewolf• 18 years ago

Take a look at the dollar. Looks like it's in freefall.

http://finance.yahoo.com/q/bc?s=USDJPY=X&t=5d

whacked_new3• 18 years ago

Wow, I don't follow this enough. That's like the exchange rate a decade ago. Amazing.

ctkrohn7• 18 years ago

S&P index futures down 30 pts, US 10yr note up one and a quarter points, Nikkei off 4%. The US market is going to shit itself tomorrow, not because this is a negative event, but because this indicates just how bad things really got.

moog2• 18 years ago

Looks like all those pundits predicting a 'slow-down' or 'mild recession' for the next couple of years were being wildly optimistic.

ctkrohn7• 18 years ago

I think this is actually a positive for the market. Now that people don't have to worry about trading with Bear and know that the financial strength of JPMorgan is behind their obligations, there should be a return of confidence.

moog2• 18 years ago

But this problem is bigger than Bear, isn't it? So former Bear clients may now be happier trading with JPM, but what about all the other banks that are about to go to the wall?

henning• 18 years ago

Capitalism for the poor, socialism for the rich. Welcome to America.

ctkrohn7• 18 years ago

How is it socialism for the rich when one of America's leading financial institutions is completely wiped out?

giardini3• 18 years ago

For one thing because the Fed is buying the crappy mortgages and mortgage securities that brought Bear Stearns to it's knees. IOW the Fed is accepting those securities as "good" when they really aren't.

Also, the Fed is extending federal insurance to BS somehow. Prior to Friday, BS had no such insurance, paid for no such insurance, did not follow the rules for such insurance but now, surprise, their customers get Federal insurance for free.

So yes, it is indeed socialism for the rich: your dollar is being devalued to buy worthless mortgage securities so that a firm used by the wealthy can be saved from collapse.

Bernanke's pulling moves out of his ass here: he should have let BS fail. Now every hedge fund will think the government will save it (which the government may try). Those are the same hedge funds that have been posting returns above 20% annually for years and that you need at least $200K to open an account. These funds didn't want to be monitored by the SEC while their value was going up. Now they've hit a snag and they're crying like babies for a Federal bailout paid for by your dollars.

P.S. OMG! They just did it! Just off the Washington Post presses: =====================

"[The Fed] announced a new provision that will in effect do the same for major investment firms. Starting today, and lasting for at least six months, this new operation will allow "primary dealers," which are 20 major Wall Street firms, access to cash in exchange for assets in which the market is not currently functioning"

=====================

So for six months the Fed is going to buy any and all illiquid (read "crappy") securities that these 20 Wall Street firms can't unload on their markets. Astonishing!

Soon we'll have to swap dollars for toilet paper: they'll both be better suited for the other's purpose.

hollerith• 18 years ago

From the Times article:

The companies said that the Federal Reserve would provide special financing in connection with the transaction and that the Fed had agreed to fund up to $30 billion of Bear Stearns’s “less-liquid assets.”

aswanson3• 18 years ago

Is Citi next? http://www.bloggingstocks.com/2008/01/15/citis-bad-news-bank...

ctkrohn7• 18 years ago

I don't think so -- Citi is unlikely to have a major liquidity problem since they've attracted major investments from overseas and have billions of dollars in assets from their retail and commercial banks.

Lehman might be next... their stock was off 13% or so on Friday, and their credit default swaps are trading around 500 basis points... people aren't very upbeat.

Tuna-Fish3• 18 years ago

Citi's problem isn't liquidity, it's solvency. One look at what terms they took that major investment from overseas is enough to tell that you should be very far from anything that loses value when citi blows up.

Eliezer• 18 years ago

Ooh, that's got to hurt.

wallflower2• 18 years ago

One of my friends commented today that the US Gov't is now taking measures to shore up the economy - however he remarked that they did very little to control the economy during the boom period. For example, if the stock market falls 500 or whatever points, there are built-in circuit breakers to halt trading. However, in the roaring NASDAQ/Dow days, there were no circuit breakers to prevent crazy, gambling-style appreciation..

The best analogy I've read likens the economy to California Wildfires. One of the reasons the California wildfires were so intense was the policy of fire prevention. Forests in the natural cycle of burn and regeneration seem to require a healthy burn once in a while. Obviating the natural wildfires leads us to bigger conflagrations. One can liken the economic impacts of lowering interest rates to fuel the housing bubble to putting out natural wildfires, building up fuel for a bigger economic problem (recession, millions of upside-down mortgages)

Prrometheus• 18 years ago

An interesting facet of this fiasco is that the poison of artificially low credit is also being touted as the antidote. I for one believe that we would have been better off if we let the economy slip into a recession in 2001 and coped with 7% or 8% unemployment, rather than causing a massive asset bubble and a gigantic financial mess.

jdavid4• 18 years ago

i doubt we would have seen 7-8% unemployment. the US wines when unemployment reaches 4%. Typically in recessions large companies lay people off to protect share price and free up cash. It's just an excuse to shareholders to let go some of the spending. If companies were to cut spending in a boom time shareholders would speculate that something bad was going to happen.

in recessions labor prices return to market value, and entrepreneurs like us can afford to hire talent.

the best indicator of an economic down turn is a cut in R&D, and from what I can tell engineering salaries are still increasing right now.

I think the thing to do, instead of bailing out homeowners with low interest rates is to provide a free education. we are in a full blown knowledge economy and EVERYONE will have to make the transition sooner or later.

trevelyan• 18 years ago

You already have 7-8 precent unemployment and probably had it back in 2002. The reason you don't know this is because of the very specific US way of counting unemployment: someone who has not "actively" looked for work in the last 4 weeks is not counted.

This is the reason countries in Europe tend to report higher unemployment than the United States does. Look to payrolls reports and the percentage of the population "working" for a better sense of the job market.

kingkongrevenge2• 18 years ago

> they did very little to control the economy

Huh? They explicitly controlled the economy. They pumped cheap credit and deliberately passed various legislation to further inflate the housing and derivatives markets.

You have to understand the government at all levels is in on the action when it comes to these bubbles. They profit both in terms of tax revenues and by straight-up payola. Government milks the scam just like the perps, and then when it falls apart they release a "lessoned learned" study and prosecute a few scapegoats they parade on TV. You'd have to be pretty naive to think the key regulators and legislators are genuinely surprised by these crises that roll around every 8 years. They're really involved in making them happen.

caudicus4• 18 years ago

He's saying they should have tried to slow the economy down when it was raging upward...which I think you know, but you were just being overly cynical.

In terms of the Fed wanting to promote the economy and "make money" for the government...not so much. The Fed as an organization is set up to operate independently, and in the long run the government is going to lose more money due to economic fluctuations. The whole point of a central bank is to smooth out the business cycles (to everyone's benefit).

joao• 18 years ago

On a trivia note, as we're on Y News: Zed Shaw (from Rails Is a Getho rant fame - http://zedshaw.com) works at Bear Stearns and they have lots of RoR projects over there.

mechanical_fish• 18 years ago

Let us all pray for Zed's sake that his mighty cynicism was strong enough to convince him to sell his Bear Stearns stock as soon as he got it.

Apparently Bear Stearns employees were partially paid in stock, and a third of the outstanding shares are held by the employees. According to the NYT:

http://dealbook.blogs.nytimes.com/2008/03/16/the-cost-of-bea...

the drop in stock price averages $375K per employee. Of course, the stock was not evenly distributed across the company, so some employees lost much, much more than $375K, and some lost less. But, still... that sound you hear is the sound of 14,000 Bear Stearns employees losing substantial portions of their life savings.

Index funds. Index funds. Index funds.

ctkrohn7• 18 years ago

According to co-workers of mine who used to work at Bear, the stock comes with a rule that requires you to hold it for a certain period of time. So most of these guys probably got burned.

mixmax• 18 years ago

Don't panic!

dskhatri• 18 years ago

Bear Stearns current losses from the sub-prime investments are $3.2bn but GM's losses were reported as 39bn sometime last year. Why is the Bear Stearns saga so significant?

Edit: I didn't understand the whole problem behind Bear Stearns but this Q&A from BBC details the issue really well (would still appreciate some insight or further reading links though): http://news.bbc.co.uk/2/hi/business/7296827.stm

samwise• 18 years ago

What happens to the share holders, as the stock was trading well above $2 at the end of the day friday?

rokhayakebe• 18 years ago

while some people worry about a tech bubble bursting, this what happens in the financial world.

Tuna-Fish3• 18 years ago

What do you think is gonna happen in tech when there is almost no financing available?

nostrademons2• 18 years ago

Same thing that happened in 2000-2002 when there was almost no financing available. Folks grow businesses by being cheap, doing the work themselves, and having a revenue model.

kul• 18 years ago

Taleb vindicated. Again.

mdemare2• 18 years ago

Malcolm Gladwell on Taleb's investment strategy: http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm

aswanson3• 18 years ago

The swan swims again:http://en.wikipedia.org/wiki/Black_swan_theory

patrickg-zill• 18 years ago

JPM is a bank and the Fed can loan money to them in a way that they cannot to BSC because BSC is not a bank.

As I understand it, the Fed will essentially loan against 100% of the value of $30B worth of hard to liquidate, hard to value (read: value is less than 100% of face value) mortgages as part of the deal, covering JPM's exposure in that part of the business.

What should happen: head of BSC should face criminal charges, not for running company into ground, but for lying to small investors (you and me) while disclosing other information only to large investors (JPM and other institutions). This is a violation of SEC rules.

This is not the first time JPM helped, there was the banking panic of 1893 (IIRC) - JPM bailed out the USA and in return, got $7 million in fees.

JPMorgan buys Bear Stearns for $2/sh, ~$236mm total

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