… start with a company worth $20 Billion and spend all your time on the golf course. Cayne, what a disaster.
Bye bye Bear, sad to see you go.
I gotta say, if I had shares of BSC and it went from $70 to $2 in a week, I’d be seriously pissed.
The more I think about it, the more I think this deal will not go through. The $2 share price is close enough to zero for everybody, including anybody who bought on Friday that they have a strong incentive to sue or vote to send the company into Chapter 11. Given that the building alone is worth about $1 billion and its highly unlikely that the operating business is worth -$750 million, this pretty much seems like a robbery. If I owned the stock, there’s no way I would vote for the deal - I’m better off taking my chances with a shareholder lawsuit or going through chapter.
That said, Dimon made a great deal. He should have bid $1 share, just to give Jimmy Cayne the finger. But the fact of the matter was that the Fed was only going to make the liquidity guarantee for JPM, so it was a fait accompli that Bear had no negotiating power. It’s actually pretty tragic - there are lot of senior and midlevel guys who’ve been there for years and had to swallow their annual bonuses in stock, which are now worth dick. Plus, most of them will be fired, as well, into a terrible market for bankers.
It’s pretty much like Enron. When the end comes, it comes fast and hard.
I don’t know, you are assuming that we know all or even most of the details. For this deal to have been accepted by Schwartz, the situation must be a lot worse than we have been lead to believe up until now.
It’s a shame to see the old firm go. How many more?
Well, there is someone in West Virginia who could up the offer to ~$276 Million. Would that help???
Wow. Truly memorable. Which one is next?
Ugly, ugly stuff!
You speak as if shareholders have first claim on the building. I can assure you they most definitely do not.
I doubt any of us want to really dig down and figure out what the on- and off-balance sheet liabilities look like at Bear. There’s a house of cards much bigger than the headlines here. It’s a bailout of the counterparties and lenders, not the common equity.
You speak as if shareholders have first claim on the building. I can assure you they most definitely do not.
I doubt any of us want to really dig down and figure out what the on- and off-balance sheet liabilities look like at Bear. There’s a house of cards much bigger than the headlines here. It’s a bailout of the counterparties and lenders, not the common equity.
That may very well be true, but given that they certainly have equity in the building, and the operating business is highly unlikely to be a zero or negative value entity, this begs the question as to whether Bear shareholders are better off taking the deal or turning it down and opting for bankruptcy. Given that they’ve lost 100% of their investment, they have no incentive not to fight the deal and take some chance of getting a better price. However, obviously, any BK filing would be incredibly destabilizing to the markets, but Wall Street guys tend to think in terms of me first, you later, if at all.
My point is from a game theory standpoint, I wouldn’t discount a considerable probability of them fighting it.
Given that BSC employees own 1/3 of the stock, I agree completely. There are two ways to look at their downside: (a) $2 to $0 is not far at all, so voting against the proposal is entirely reasonable. I suspect that everyone that bought the stock last week would agree with that viewpoint. (b) The slightly longer term view would suggest that financial services industry professionals might want to continue in that industry, which might lead them to place the importance of stability (ie presence of jobs in the sector in the future) ahead of the fact that their equity value just got wiped.
Shareholders have equity in all the assets, including the real estate. That’s certainly true. However, we are talking about TRILLIONS in derivatives exposure. While Bear is on the paying end of roughly half and the receiving end of the other half, it’s no sure bet that these offset neatly. Looking at it from another perspective, the Fed’s financing is worth a few basis points to JPM on this exposure. That’s a hell of a lot of risk and not a lot of compensation for it.
While it looks to some observers like JP just got Bear for free, it’s not clear at all that the $7.7b of breakup value on the business segments and another billion or so of real estate isn’t completely wiped out by possible trading losses.
I think the trillions figure is very deceptive. It’s certainly trillions in notional exposure, but nobody knows what the actual net exposure is, and certainly what it is from a VAR standpoint. That’s not the issue, as far as I’m concerned. The issue is that they have a lot of mortgage paper on their balance sheet that is essentially impossible to value. A BK filing would have forced sales of difficult to value paper into illiquid markets, causing everybody else on the street to remark their book, which could have caused more sales, margin calls, etc., into a fairly nasty cycle which culminates with a shutdown of all of the capital markets. Likewise, a BK filing would have forced all of the creditors of Bear to revalue/write off some of those obligations, causing a similar cycle.
JPM is saying that the deal will be $1 billion accretive to their bottom line. Clearly, they got a very good deal and the Fed was only going to let them bid on the deal. But as I said, the shareholders have little incentive to go along with the deal. The bankers being fired at this point don’t have a lot of incentive because the market for bankers right now is crappy. Most senior bankers have literally lost millions from their net worth, and hopefully they weren’t borrowing against it. The other element is that 25-30% is owned by Joe Lewis, Jimmy Cayne, and Legg Mason. Given that they’ve lost billions, I suspect they will have to think long and hard whether they want to do a complete writeoff or see if they can get a better price in a market that’s more stable.
Why are you guys so sure they own the building? Back about 10 years ago I would have said they probably did but today i highly doubt it. I work for Citigroup and we own less than 5% of our buildings. We used to own them but when Sandy Weil came riding into town he sold them and did triple net lease-backs on 95% of owned properties. Built up the huge war chest of cash he used to buy companies left and right from 2000-2005. Many other large companies with real estate holdings did the same thing. Citigroup Center in San Francisco is owned by a German REIT and has been for 6 years.
Dave
It’s been reported in the media that they “own” the building. I suspect if it were a sale-leaseback to a REIT, that would have been obvious and prominent and mentioned in reports as well as last night’s JPM conference call.
To be honest, I don’t think its all that relevant. It was just a measuring stick to show how lowball the JPM offer is. Probably a better measure is how much they expect to earn from the deal this year. As I said, I think its not a certainty that shareholders vote for the deal. If I were Joe Lewis and just lost $1.2 billion in five months on Bear, I’d certainly be willing to risk another few million in a lawsuit or simply voting against the deal because there’s no reason why I would. I doubt that he would do so because of an altruistic instinct regarding the markets. More likely, he could vote against the deal and then short a shitload of S&P futures if he thinks it will crater the market.
The value of a business is what someone is willing to pay in a competitive auction. They made all the right calls and $2/share is what they came up with. The shareholders can either take $2/share or get zero. Bear has the bankruptcy filings all set to go. This is good example of how opaque the accounting treatment for financial companies can be. It’s clear that the folks inside Bear knew there was a strong disconnect between their public market valuation and their real financial condition. However, once in the zone of insolvency their obligation switch from that of its equity holders to that of its existing debtors. My sense is that this is one for the age for class action attorneys, but there are no signs the deal will not go through.
$236 million…thats about 500 of those foreclosed homes in California they were dabbling in.
Bear Stearns = 500 3/1 ranches, who’d a thunk it.
The value of a business is what someone is willing to pay in a competitive auction. They made all the right calls and $2/share is what they came up with. The shareholders can either take $2/share or get zero. Bear has the bankruptcy filings all set to go. This is good example of how opaque the accounting treatment for financial companies can be. It’s clear that the folks inside Bear knew there was a strong disconnect between their public market valuation and their real financial condition. However, once in the zone of insolvency their obligation switch from that of its equity holders to that of its existing debtors. My sense is that this is one for the age for class action attorneys, but there are no signs the deal will not go through.
In the first place, it wasn’t a competitive auction. The Fed was essentially only going to back JPM to do this, as no other bidder was going to get $30bn at the discount window as a backstop to their bid. Obviously, a whole universe of entities could have paid $260 million as it is a rounding error. And given that BSC had no other options, they could have bid anything and won, hence $2. The Fed wasn’t going to allow BSC to file, nor did BSC want to file, in the interest of not having the entire US financial system collapse in one day. This wasn’t a matter of liquid markets determining a corporate value - this was triage and extenuating circumstances, so to say this was some kind of open auction is incorrect.
Additionally, Bear is not insolvent, far from it. Even if one haircuts their book value of $84/share, its still probably quite solvent. The problem for Bear, and for all companies in general, is that they lost their liquidity and were unable to roll their obligations. And once that begins, its unstoppable and creates a crisis of confidence and its over. It doesn’t mean the company is insolvent or has a negative value. It means that it’s out of cash, and that is a very different thing. You don’t file Chapter 11 because you’re insolvent. You file because you can’t access financing.
And as I said, for shareholders, they have a different proposition to consider. Most of them have probably lost 99+% of their investment, so its not as if they’re sitting there and thinking how lucky they are to get $2, or the cost of subway fare. They are basically holding a one-sided option. On one hand, they take a complete loss and walk away, or they pay nothing, vote no and potentially get a lot more. That seems like pretty simple calculus.
As I said, if I were Joe Lewis and sitting on a sure $1.2 billion loss, why wouldn’t I roll the dice and see what comes out?
So, I assume that there are a number of people who knew for a while that this was going to happen, how does that get handled? If, say, I’m a VP at BS and my brother in law shorted 1000 shares at $100 last summer, does that get investigated?
I shorted 750 shares in the ST investment challenge last week (why does this only happen with play money?)…I hope I don’t get investigated 
Actually, I don’t think many people knew at all. Alan Schwartz was on CNBC saying that all is well on Wednesday. By Thursday, the situation had worsened dramatically, with apparently the European banks refusing to trade with Bear. By Thursday night it was pretty much over. By Friday morning JPM was there backstopping and basically acting as only bidder.
I doubt that will be an issue. It’s only potentially a problem if senior execs were dumping shares early last week while Schwartz was trying to calm the public. That would be extremely bad. But the fact of the matter is that if you were anywhere from VP to SMD at Bear, you were eating a lot of restricted stock in your bonus for years, which is now worth zero. That was people’s retirements, their collateral for loans, etc. It’s pretty awful because they’re also out of a job in all likelihood. As I said, its pretty much Enron 2.0 - one day your counterparties decide your credit is no good, and 48 hours later you’re done.
I’m short Lehman (real money), covered some on Friday and shorted more today. There’s nothing like having skin in the game to make you pay attention.
The bailout angle, from the AP: “The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.”
Actually, I think this is a equity AND debt purchase. JPMC is purchasing a lot of BS debt, and it just so happens that the equity price, to balance out the value of the company, works out to $2/share. If you include the debt, the actual price JPMC is paying is closer to $85/share, or over $30B (that is the max the Fed will fund, so clearly there is more risk JPMC must assume), a substantial premium from the $57 share price of Thursday. I think they are paying a premium, because they are getting a really good deal on the financing from the Fed.
I think you’ve got it all wrong.
When you buy a company in a stock purchase, you absorb all of the assets and liabilities of the target. The net of that is known as the equity. If you pay $2/share, you’re saying that the assets are only worth $2 net of the liabilities/debt. Given that Bear’s book equity (as opposed to market price of equity) was $84/share, this is obviously a substantial haircut. And given that JPM is going to harvest something on the order of $1 billion in earnings from Bear this year, its even less likely that Bear is “worth” $2/share. But that’s not the point. Even if Bear’s assets are impaired, and we have every reason to believe that they are significantly impaired, its unlikely that they would be impaired to the point of erasing $82 in equity per share. So they are NOT paying a premium. In fact, its more easily argued that Bear simply went away, and that the Fed is allowing JPM to make a lot of money on the deal in order to compensate it for rescuing the US financial system.
In any case, the Fed is not lending JPM any cash, per se. What they are doing is allowing JPM to borrow from the discount window using Bear’s mortgage and other bonds as collateral, heretofore a privilege only allowed for commercial banks. This will give JPM liquidity for Bear’s assets, which was precisely the problem that got Bear into this fix in the first place. In fact, if the Fed had opened the window for Bear last week, we wouldn’t be having this conversation.
Actually, you are not quite accurate on several fronts. They called multibanks and hedge funds. I can confirm this because one we are associated executed a CA and was in discussions with the company for a short period and spoke to the Fed about the backstop. Second, the Fed has no control as to whether someone can or can’t file for bankruptcy. It would have been very bad for the system, but the first day orders were prepared and they were ready to file them. Lastly, Bear was very insolvent. They could not meet their creditor demands when they came due. No one would lend them the money to meet their forward obligations. That’s technically insolvent. I was told a third party opined on it for the deal.
Anyone who lost big money on the fall of Bear is an idiot in my book, you could see this coming 6 months ago. Many hedge funds made hundreds of millions of dollars on the short shit. It was inevitable. The more interesting question is will Lehman go down next.