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JPMorgan buys Bear Stearns for $2/sh, ~$236mm total (nytimes.com)
56 points by ctkrohn on March 16, 2008 | hide | past | favorite | 67 comments



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.


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.


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."


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?


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!


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.


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?


or worse some bonehead warmonger. war and sinking economies have some strange correlation.


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


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.


it takes time for information to be priced in

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.


Charlie Munger, in a talk offering some criticism of economics, thinks that the 'efficient market hypothesis' is basically bunk:

http://www.tilsonfunds.com/MungerUCSBspeech.pdf


$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).


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


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?


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)


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.


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.


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.


> 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.


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).


> The whole point of a central bank is to smooth out the business cycles

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.


The Federal Reserve was created after the panic of 1907, because J.P. Morgan (ironic, isn't it) single handedly stopped the panic by buying out the second-most-bankrupt bank (he let the worst one fail). He was the only one in the U.S. who could do so; the Federal Government had no mandate to intervene in economic matters. After the crash, a bunch of congressmen decided it probably wasn't a good idea to have the nation's fiscal health in the hands of one man who was looking out for his own interests above those of the nation, and so they created the Fed to serve as the lender of last resort.

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.


Well, modern day central banks operate through Keynesian principles of economics which were not developed until the mid 20th century - http://en.wikipedia.org/wiki/Keynesian_economics - so I find it hard to apply the writings of Thomas Paine to them. I do realize the US Federal Reserve was founded before that (1913), but modern fiscal policy decisions are based on Kaynes' work.

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.


Firstly, fiscal policy pertains to government spending and/or tax policy, none of which a central bank is involved in. Central banks are strictly in the business of monetary policy.

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?


>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.


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.


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.


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.


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


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


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.


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

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


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.


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




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.


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.


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


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.


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?


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


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


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


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.


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


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!


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... - 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.


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.


"I am right and you are wrong." -book by Edward de Bono

[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".


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.”


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


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


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.


Don't panic!


Taleb vindicated. Again.


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


Ooh, that's got to hurt.




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