JPMorgan buys Bear Stearns for $2/sh, ~$236mm total
nytimes.com
nytimes.com
- 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 market will price things appropriately in time but, as the saying goes, the market can stay irrational far longer than you can stay solvent.
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.
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.
Also, deviations from situations predicted by EMHhelp identify weaknesses or abnormalities in the real market.
Financials are going to have a wild ride on Monday.
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?
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.
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)
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.
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.
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.
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).
That's the cover story. A few centuries of data from source around the world clearly show that central banking destabilizes prices and economies and aggravates the business cycle.
The purpose of central banks is to allow a connected elite to rip off the population at large through seigniorage.
This is NOT conspiracy theory garbage. This has been popularly understood at various times in US history. Tom Paine wrote about it extensively as a best selling author. Andrew Jackson got a mandate to dismantle the national bank.
Related to that, the historical US National Bank (http://en.wikipedia.org/wiki/First_Bank_of_the_United_States) and Central Bank (Federal Reserve) have very different objectives. Do not confuse the two.
Secondly, most western central banks (though not the Fed) explicitly concentrate on inflation targeting, not "priming the pump" (as Keynes would say). In fact Keynes wasn't really very interested in inflation, which is fair enough given that economists didn't seem to take it all that seriously until the stagflation events of the 70s.
But having said that, I'm more inclined to agree with you than the grandparent. Without a central bank, how is the money supply controlled?
By natural business cycle of economic expansion/ contraction. Cost of money fluctuates, when it goes up there are recessions that clear up the inefficiencies (i.e. all businesses that produce return below required market rate go bust). That's what lacking today thanks to central banks' intervention. They postpone the cleansing as much as possible, until the disbalances grow up in such a monster as we see today.
The problem of course is that people don't like even mild recessions and politicians are following them. The Fed system was setup in 1913 after the population was fed up with regular boom/busts of late 1800s/early 1900s.
A similar situation existed in Europe, where the Rothschilds functioned as the lenders of last resort to the kings and queens of Europe. Because of their special relationship with the rulers, they made obscene profits through superior access to information and special interest rates. European central banking is largely a reaction against the concentration of so much power in private hands.
A connected elite will always rip off the population at large. There seems to be no way around it; if you cut off one government organization, some robber baron will just grow into the role. Nature abhors a vacuum. It's better to know who the demons are and have some semblance of nominal regulation to keep them honest.
BTW, Andrew Jackson and Thomas Paine were demagogues, much like Ron Paul and Pat Buchanan are today. Their goal is to form a new connected elite by preying off the passions and fears of the population. Never underestimate the power of stupid people in large groups, and all that.
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.
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
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.
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.
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.
"Ironically, after the bail-out by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the bailers." http://en.wikipedia.org/wiki/Long_term_capital_management
In this case "illiquid" and "crappy" securities are the same: securities that are worth much less today than they were yesterday and that are projected to be worth even less tomorrow and for which the bottom has not yet been predicted. Those are certainly "crappy" since no one holding them wants to be holding them. They are certainly "illiquid" since no one _else_ wants to hold them.
And your reference to the LTCM bailout are hardly reassuring.
This is a great deal _only_ for J.P. Morgan.
It's a very bad deal for U.S. citizens, most whom have no large holdings in J.P. Morgan. Essentially the taxpayer is taking on all of Bear Stearns' bad investments and J.P.Morgan is getting all the good parts of Bear Stearns at reduced price.
But that's only the beginning. The Fed guarantee to back up these 20 Wall Street firms for the next six months will be disastrous. That gives them 6 months to dump all their garbage onto the Fed. What a deal.
Hey, I've got a 1995 Buick that I can't sell and I'd like the Fed to buy it back for the $8000 I paid for it. I had no idea it wouldn't become a classic selling for twice what I paid for it. Justice! Give me justice!
Projected to be less tomorrow? Says who? I would think that JP Morgan would not accept even a $2/share buy out if they thought it would be worth less tomorrow. They would only make such an offer if they thought it was a good deal to them with a potential upside. Thus they are willing to buy a "illiquid" asset and provide "liquidity" for "value" to themselves. It's how the world goes 'round. Illiquid and crappy may be the same thing now, yes, but investment is, by definition, making decisions for future profit. This is why, in terms of net present value, crappy and illiquid are not the same thing. JP Morgan is thinking "This is a great opportunity".
In terms to my reference to LTCM as being hardly reassuring: get over it. We are in a credit crunch. We were in '98, we are now. It's bad, yes. This is probably worse than LTCM. I never said this was good, I said that 'illiquid' and 'crappy' are not by definition the same thing. That's all I said.
I'm not even going to address your Buick analogy. Read this book - http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen... - it will give you a good idea how credit markets operate and how they can act irrationally.
Right now the major issue is that no one knows how to value themselves because no one else knows how to value themselves because no one can value their portfolios. And in that uncertainty no one can judge who is right and wrong, who is getting a good deal and getting a bad deal. This is exactly why this situation is so screwed up. And this is exactly why the Fed is offering to provide liquidity for the rest of the market: because no one else is liquid enough to. Yes, it is a moral hazard, it sucks, but it is how it is.
Look, this isn't a zero sum game. For all we know, inaction by the Fed could lead us down a more damaging path. There are smart people working there, with far more education and experience than both of us and then some. Let us not be so quick to judge.
[In deference to de Bono I must add that I am using the phrase with it's original meaning.]
Indeed I am right and you are wrong. The foreign markets are punishing the Fed's moves.
1. Yes, BS was "projected to be worth less tomorrow". Until the Fed stepped in, JPM wouldn't touch BS without the Fed first taking the bad parts.
2. J.P. Morgan is buying only the "liquid" assets of BS; the Fed is getting the illiquid assets. Of course that's a sweet deal for JPM. It's a very bad deal for the Fed and the U.S. taxpayer. And part of the deal is a 6-month guaranteed bailout for hedge funds for the rich that have been posting returns from 20%-80% annually. Moral hazard never reached such scales before.
3. Drop the straw-man "this isn't a zero-sum game" statement: everybody knows that. The Fed's move is a redistribution of wealth regardless: wealthy investors are now wealthier than before the Fed stepped in and the value of the dollar is plunging further.
4. "There are smart people working there." How smart? I don't see the smarts oozing out today as the foreign markets punish the choices the Fed makes. Wait until the stock-buying public gets into this brouhaha. I would be the last to oppose the existence of the Fed, but today there I see only people who have their own and their mostly wealthy friends' interests in mind.
5. Sometimes inaction is best. Inaction would resolve the quandary more quickly by allowing the liquidation of BS assets on the open market and punishing wealthy investors for taking high-risk investments in hedge funds. All worthy goals. And that would happen without adding inflationary fire to the economy.
6. I don't relish "punishing investors" for it's own sake. But protecting high-risk investors against risk is foolish and, in the end, inflationary. "Caveat emptor" should apply to any investment.
This is indeed "Socialism for the Rich".
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.”