Monday, March 17, 2008

Up in smoke

I've never seen anything like it.

JP Morgan bought Bear Sterns today for $2 a share.

What's truly incredible about this is that Bear Sterns closed at $30 on Friday. Sure, that's a far cry from its high of $170 just under a year ago, but it's still a long way from zero. Or so we assumed. In danger of imminent bankruptcy, someone at BSC called up JPM and sold the company on the cheap. For a mere $236 million, JPM is now the proud owner of Bear's $1 billion Madison Avenue office tower, and a boatload of debt.

A lot of times, bankruptcy rumors get well out in front of an actual bankruptcy, but judging from the market reaction today - an 85% drop in share price - I'd say this one took a lot of people by surprise. Thankfully I don't own any (although I'm knocking on wood, since Citigroup could well be next in line), but imagine being a Bear employee. In addition to the thousands of jobs that will be lost thanks to the buyout, 30% of the stock is owned by employees. That's $6 billion in value, most of which would have been counted on for retirement, reduced to $35 million in less than a year. Next time you take a trip to New York, don't be shocked when a well-educated stock broker is driving your taxi.

And not that anyone feels sorry for the executives, nor should you, but there's no golden parachute in place at Bear. No millions of dollars in bonuses for running the company into the ground and then selling out. Just wagonloads of underwater stock options and vanished net worth.

So what does it all mean? Well, JPM was up 10% on the day, as investors realized that there is a lot of value there, once the debt is paid off and the markets start working again. So, if you assume that other financial companies will face similar straits as Bear, then there will be other winners as well. Goldman figures to get an opportunity to suck the marrow out of the bones of the next carcass, whoever the unlucky victim might be. Down here at $150, I'd pick up ten shares and see what happens. It's a much better investment than those Powerball tickets you bought.

Oh, and of course, it means that Cramer was right. He said that major financial corporations were going out of business, and today was likely just the first. Too bad he's not Fed chairman, he wouldn't have waited until it was too late to take action.


At 8:21 PM, Anonymous Anonymous said...

As a JPM employee I saw this coming Friday morning when the fed opened the discount window through the firm to Bear. The key element to this deal and what I suspect may the object of significant scrutiny in coming weeks is that the Fed is backing about $30 billion of Bear's crap mortgage positions. This makes the deal an absolute win for JPM. We get the revenue rich Prime Brokerage unit and a few other tidbits and the Fed promises that we won't get caught with our pants down when the mortgage positions continue to get downgraded. Expect to see more of this. I predict Lehman Brothers is next and if the world really goes to hell UBS. I would stay the hell away from the equity markets its a mess out there. Until then I will be doing analysis of Bear's flow option derivative positions. -Nate D.

At 9:06 AM, Blogger Sweet Tea said...


Great to hear from you, man. I expect that by now, you've grabbed NYC by the hair, and made her your metrosexual bitch? Hope you're kicking life's ass and forgetting all the names.

I didn't even mention the whole Fed bailout part of the deal - nice to know my tax dollars are hard at work, making JPM executives rich. Not much I can do about it, though, except try to catch the next bouqet of bailout money.

I can definitely see Lehman going next (Goldman-Lehman has a terrible ring to it, but still...) but I had no idea that UBS was next deep in this mortgage shit too! Let me know if your analysis turns up anything interesting, I might not understand half of it, but I'd want to hear about it anyway!

At 1:31 PM, Blogger Sweet Tea said...

ugh..."next deep" = "neck deep"

At 3:47 PM, Anonymous Em said...

Good call on the Goldman - it's up 21 today already...

At 8:06 PM, Anonymous Anonymous said...

One point I would like to make is that the money the Fed is using is NOT taxpayer dollars. The fed funds itself by selling treasuries in periodic auctions and exclusively to banks that have access. This provides the fed with a key tool to control money supply. The Fed has an estimated $800b on its balance sheets. In the past 8 months about $400b of that has been pledged in various schemes it has come up with to provide market liquidity. This includes not only the guarantee of Bear's positions to JPM but the access it has granted to the so called 'discount window'. This is a special short term borrowing tool the fed has opened to all securities firms at a rate .25 basis points above the fed effective. As of today that is 2.5%. It is either a misunderstanding by the media or a blatant ignorance that is causing the idea this is tax dollars at work. Unfortunately if the Fed's balance sheet were to be exhausted Congress would be in a position to inject tax dollars into the system. If that happens only Congress could make that decision. We saw today that Lehman and Goldman have weathered the first quarter and thus their values have jumped on hopes this is a sign the market was too fearful. Time will tell. There is still a lot of toxic debt out there and not everyone has reported. Good luck in your investing! I'm loving New York and enjoying a very rewarding experience working in finance.

At 8:07 PM, Anonymous Anonymous said...

That should be 25 basis points or 0.25 percent.

At 12:52 PM, Anonymous Tommy said...

Cramer also said

At 10:12 AM, Blogger Sweet Tea said...

Never saw Tommy's comment until I was doing some historical research almost a year later...

Cramer's explanation of that call is here.

He's not always right, not by a longshot. He's made me some money and cost me a lot too. But he was the first, and for a long time the only guy calling out the extent of the financial meltdown - except for the perma-bears who never change their tune.

Cramer's goofy, and sure he's wrong a lot, but you have to give him credit for loudly stepping out on that limb and saying some very unpopular things that turned out to be spot on.


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