Wednesday, March 19, 2008

Bear case still a crime unsolved.

When I first commented on the JPM / BSC deal I offered two interpretations of what happened.

The funny thing is, stunned financial commentators are still trying to choose between the two. Newspapers, blogosphere, market analysts, still cannot come to a single conclusion. Some, like Mish, think that the deal was an acknowledgment of Wall Street's insolvency; Mish even provided his own crude calculation of Bear's net worth and came up with $-30 billion. Others, like this analysis, assert that Bear has been set up by evil conspirators who wanted to take it over for nothing.

Whatever the explanation is, market as a whole seems to have chosen the robbery version. JPM's stock has been bid up to increase market capitalization by $10 billion. This is implicitly assigning 30$ per share value to Bear Sterns.

One might wonder why BSC stock itself is still trading at roughly 8$ per share, even though JPM will buy it for 2$. The answer is that BSC shareholders still need to vote 'yes/no' on the deal, and there are a lot of angry shareholders who did not like being robbed. In order to ensure that deal can go through, someone is buying up BSC shares to increase the voting power.

Who are these someones? The most innocent theory would be that it's Bear's bond holders, who need this buyout to happen or they lose everything (total bond value is on tens of billions). There are less innocent explanations too, but again, we will probably never know.

P.S. Maybe the only correction that I should make to my original analysis is that the theft seems to be not so much from Bear shareholders, but from the taxpayers. The $30 billion loan that JPM got from Fed to deal with surprises in BSC portfolio is not so much a loan but rather a purchase of Bear's MBS portfolio, since Fed assumed all risk. So it is more like a $10 billion gift from Fed (taxpayer) to JPM.

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