
JPMorgan buys Bear Stearns for $2/sh, ~$236mm total - ctkrohn
http://www.nytimes.com/2008/03/16/business/16cnd-bear.html
======
ctkrohn
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.

~~~
mynameishere
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.

~~~
wallflower
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."

~~~
ctkrohn
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.

~~~
whacked_new
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?

------
wallflower
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
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.

~~~
trevelyan
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.

------
joao
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
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...](http://dealbook.blogs.nytimes.com/2008/03/16/the-cost-of-bears-crisis-
to-its-employees/)

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.

~~~
ctkrohn
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.

~~~
mdemare
That's such a weird rule. What's to stop them from buying put options?

------
dskhatri
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>

------
patrickg-zill
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.

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

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

~~~
ctkrohn
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.

------
aswanson
The swan swims again:<http://en.wikipedia.org/wiki/Black_swan_theory>

------
aswanson
Is Citi next? [http://www.bloggingstocks.com/2008/01/15/citis-bad-news-
bank...](http://www.bloggingstocks.com/2008/01/15/citis-bad-news-banks-worst-
period-since-great-depression/)

~~~
ctkrohn
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-Fish
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.

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

~~~
ctkrohn
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.

~~~
moog
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?

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

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

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

~~~
giardini
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.

~~~
caudicus
Do not be so quick to say 'illiquid' and 'crappy' are the same thing. Markets
can act irrationally, both on the upside and the downside. Note that even when
LTCM failed in 1998 (a MAJOR credit insolvency event - read 'When Genius
Failed'), the Wall Street banks that bought out their balance sheet ended up
either break even or yielding some profits once the markets went back to
normal.

"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>

~~~
giardini
Getting technical on my usage of the terms "illiquid" and "crappy"?

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!

~~~
caudicus
Yes, I am. They are not synonymous in this context. Don't take it personally.

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...](http://www.amazon.com/When-Genius-Failed-Long-Term-
Management/dp/0375758259/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1205726864&sr=8-1)
\- 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.

~~~
Tuna-Fish
The upside for JP is the office building. It's worth over a billion on it's
own. Since there were no other bidders and the price was just 200m, it's
really clear that the real value of all the securities that Bear held is
negative. The only question is how much negative.

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

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

~~~
nostrademons
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.

------
mixmax
Don't panic!

------
kul
Taleb vindicated. Again.

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

------
Eliezer
Ooh, that's got to hurt.

