Two Ways to Read $2 a Bear-Stearns Share

There are two ways to read last night's sale of Bear Stearns to JPMorganChase for $2 a share:

1. There were no other bidders. Bear Stearns only other option was to file for bankruptcy this morning. And Bear Stearns's executive were convinced that that was not an option--that not playing along meant that everybody everywhere would look with glee on the filing of every criminal fraud charge against them anyone could think of.
2. Even with the Federal Reserve offering a put on the worst $30 billion of Bear Stearns assets, there is so much garbage in the closet that $2 a share is a fair price.

The market this morning believes in (2). I tend to believe in (1)--especially as JPMorgan is said to have set aside up to $6 billion to deal with litigation when Bear Stearns's shareholders and others claim they got a raw deal...

Comments

[Stern Bear]

"This morning" is fluid but right now JPM is up 10% on the day which lends support to option number 1.

I might refine it by saying "There were no other bidders with financing"

[Bernard Yomtov]

I'm not sure I follow. Why are these mutually exclusive explanations?

[Ken Houghton]

Because BSC execs could have paid $4-5/share themselves, esp. with financing from, say, J. C. Flowers (the rumored other bidder).

If there was a well-done discovery process on the two hedge funds, the firm could be toast anyway.

CITIC pulling its $1.1B was probably the final straw, presuming it followed the ratings agencies downgrades.

[SD]

That $6 billion figure includes "de-levering" the balance sheet, among other things, although JP Morgan can rely on an additional $30 billion from the Fed. Bear also owns its building. It's an interesting argument that $2/share would trump potential liquidation proceeds. I don't think either firm has alleged that to be so.

Then again, JPM has not given a point-by-point explanation of how $2 squares with Bear's prior valuation of $85. The firm may be pricing legitimate unforeseen risk into that figure, having only had a few days of due diligence.

[Stillonmt]

How can any investor rationally choose to put money into the NYSE unless he or she is an insider? The market is rigged one way or another if a valuation of $30 per share goes to $2 a share over the weekend and there is no precipitating outside event such as war or earthquake. The federal government has as much as anything bailed out the short sellers that sold at $30 on Friday and made $28 today. The markets become not an investment vehicle but a roulette wheel with someone else's hand on the wheel. Can someone explain to me why publicly traded investments make sense to an investor that is not an insider?

[Aziz]

I don't think that 1 and 2 are mutually exclusive. In fact, they're basically the same. All the "garbage" in the closet also includes off balance sheet liabilities, such as the potential for litigation. So, $2 a share could very well be a fair price once all the off balance sheet liabilities (including potential litigation) are taken into consideration along with all the other rubbish that actually sits on the balance sheet.

[save_the_rustbelt]

I vote for both.

I think the deadline (to do a deal before Asian markets opened) sealed the deal, for better or worse. Time was the enemy of negotiations.

[Charles]

Bear execs are in hot water anyway. They were peddling the "no liquidity problems here" line just days before they were declared virtually worthless. If I were a shareholder, I would be warming up my lawyer right now.

[misplaced trust co.]

(1) is more true. Only a deal by Asian market open with an entity of JPM's scale, capital and reputation could improve the market's perception of BSC counterparty risk sufficiently to avoid a BSC insolvency (and by extension LEH, MS, and the whole chain o' dominoes from there). BSC and JPM have told their clients this morning that all counterparty exposure is now to JPM. So, Flowers (and the rest of the PE/LBO world) was effectively out and no other bank was in position to do this.

[Buce]

But it's /not/ $2 a share. It is $2 a share minus the value of the put. link

[david]

I thought the $6 b also included severance and retention bonuses to keep all that prime talent around. Is that a separate account?

[Matt]

Isn't the problem uncertainty about what's in that closet? It's possible that $2 is the bargain of the month, but... maybe not...

[Emma Anne]

Charles: you probably are a shareholder. BS was in the S&P 500, right? So everyone with an index fund saw a chunk of it vanish last night.

[Bernard Yomtov]

"I thought the $6 b also included severance and retention bonuses to keep all that prime talent around."

Yeah. Important to retain the geniuses who've been doing such a great job.

[demisod]

"Yeah. Important to retain the geniuses who've been doing such a great job."

It's important to the geniuses. And isn't that what's really important?

[derek]

$6 billion.

I'm convinced that when the right talk about how much more "efficient" the free market is than a government enterprise, that they're mainly defining the losses a private company takes as "good spend" (after all, somebody gets that money!) while the same losses by a public body are *terrible inefficiency* (because money a government spends just disappears from the universe altogether).

Why isn't the entire advertising industry and half the legal industry not counted as an inefficiency of capitalism? Why are they counted as "economic vitality" instead? I always hear the words "multibillion dollar industry" and "thousands of jobs" like the jobs are doing something useful instead of useless.

[LibertyGuard]

Can we discuss Social Security proviatization in the same breath as we discuss taxpayer bailout of Wall Street?

[TrueBlue2]

Of course the cynic in me says that if a bankruptcy is forestalled, then none of the seven figure bonuses can be clawed back by the BK judge.

[TrueBlue2]

Of course the cynic in me says that if a bankruptcy is forestalled, then none of the seven figure bonuses can be clawed back by the BK judge.

[LookingForResponsibleAdults]

The Fed said it was not going to back the deal unless the equity holders were wiped - Bernanke's price for preventing any moral hazard problems in the future. It was not the buyer, it was the backer setting the price.

Looks like it worked - no one calls this a bailout for Bear-Sterns, it was a bailout for the the financial markets - and hence the x% of the population with stocks including those screaming about "Wall Street".

Perople have no idea what their 401(k)s woulda looked like today if Bernanke hadn't fixed this. Down 10% and then we would see the margin calls spiral it down further

Bernanke is the responsible adult in the room.

The US populace still thinks this is a Wall Street issue, rather than having borrowed govt and private lines and investing in marble countertops, SUV exhaust gases, things that go boom, and Viagra for the old. With the EURO around, there are alternatives and the rest of the world is tired of seeing waste.

[Auto]

At $2/share, why didn't the Fed just buy Bear itself and then conduct an orderly sale of its assets? After all, Bear faced what was finally just a liquidity issue.

For a lousy ~$250 million, the Fed could have acquired a firm whose Madison Ave HQ alone is worth an estimated $1.2 billion.

[zeno2vonnegut]

Roubini thinks the $2/share was fair. "As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent." He makes a much larger point that with the Fed opening up the credit windows to organizations it does not regulate, there is a high probability of socialization of loss of enormous proportion. His article, "A Generalized Run on the Shadow Financial System" is at: http://www.rgemonitor.com/blog/roubini/249924

[jerry]

"At $2/share, why didn't the Fed just buy Bear itself and then conduct an orderly sale of its assets? After all, Bear faced what was finally just a liquidity issue."

It's one thing for the Fed to take over a whorehouse (Mustang Ranch), but even the Fed has some limits when it comes to skanks and sleazebags. Consider for one the sheer numbers of MBAs and lawyers that must roam the halls of Bear Stearns. Yuck!

[PSP]

As a bankruptcy lawyer, I can only say "But it would have been so much fun to watch!"

The organizational meeting would probably have to have been held in Madison Square Garden. All the circling sharks would have created the biggest feeding frenzy since Jaws. The cry "Full Employment for Lawyers!" would have been heard echoing up and down Manhattan’s avenues. The "secured" creditors' screaming would probably have been clearly audible here in northern NJ, even if BS filed in Delaware. And the chain reaction as creditors and employees followed them down would have been truly awe inspiring.

It is not hard to see that there might have been a few practical problems, which some (Not I) might have thought detracted from the desirability of this senario. How much would debtor's counsel have demanded up front? $100 million? $500 million? Did BS have that much cash handy? Even with associates burning the midnight oil all weekend to produce the papers, and judges cooperating to set up emergency hearings, getting the necessary first day orders heard and entered probably would have kept Bear Sterns from trading today, maybe longer. Just figuring out what orders would be needed would require a close examination of operations and could take awhile. Putting together a list of transactions that needed Court approval would be a substantial task. Who needs critical vendor status? Could they get DIP financing? Would the Fed provide DIP financing??????

Let’s just say, a big Chapter 11 is usually planned for months, not two days. But I wonder which Firm didn't sleep last weekend.

[RM]

If the market thinks JPM paid fair value, why is JPM's market cap up 12 billion in trading today?

[Charles]

Emma Anne says, "Charles: you probably are a [Bear Stearns] shareholder"

Gee, what tipped you off, Emma Anne? Perhaps it was my comment "If I were a shareholder..."?

Note the use of the subjunctive.

Logic is, alas, dead. People "reason" by deciding who a person is, not what they are saying.

[jerry]

Charles, I don't think you understood Emma Anne's comment.

She was suggesting that if you participate in an S&P index fund, or a pension fund with an S&P index fund in it, than indirectly you ARE a shareholder of BS, because that S&P index fund will be holding BS.

Apart from that your snark is too funnay!