Sunday, March 16, 2008

JPMorgan gets a gift of Bear Sterns.

Only last Friday Bear Sterns has collapsed spectacularly. And two days after, rubble has been clumsily swept under the carpet.

As you can read in various news sources, JPM bought BSC for a laughable price of 2 dollars a share. I guess Bear had to be sold before Japanese stock market opened on Monday morning, hence the Sunday night press releases.

As I have previously mentioned, nothing scares Fed and Wall Street more than a full derivative unwind that an outright bankruptcy by Bear would trigger. Also, Bear is a major clearing house, and if they stopped processing transactions it would have paralyzing effect on the markets. So, you might be inclined to think that it is good news that BSC was sold, and said unwind was prevented.

But let's consider the actual deal. Just 6 months ago Bear was valued at $18 billion dollars, or 150$ per share. Even after it became obvious on Friday morning that Bear is no more, panicked investors valued it at 30$ a share on NYSE. On Saturday, Bear executives claimed that the book value of the company is actually 80$ per share (book value is total assets minus total liabilities, so in theory company should be worth at least that much).

But JPM buys them at 2$ a share.

You can only explain this in one of two ways, and neither one is pretty. Pick your poison:
a) Bear Sterns, the brightest, smartest, one of the most reliable investment banks on Wall Street, was in fact nothing but an empty shell. This should immediately ring an alarm bell in any investor's brain: if Bear was nothing but the smoke and mirrors, and was valued at $18 billions just a few months ago, what about the rest of the Wall Street? Doesn't this implicitly confirm the suspicion (that so many already voiced), that most of the big Wall Street firms are insolvent for all practical purposes?

b) One of the greatest robberies of our time just happened in broad daylight, with an enthusiastic prodding by the Federal authorities. At least $10 billion of wealth was stolen from Bear Sterns shareholders and transfered to JPMorgan Chase. In a clumsy attempt to prevent market seizure Fed has violated every rule of free markets. Whatever remained of trust that foreign (and domestic) investors might have had in fair and honest functioning of US markets has likely just disappeared this Sunday night.

The fact that Fed allowed this deal go through on such conditions shows just how scared they are of a complete and total market failure across the globe. Scared witless does not even begin to describe it.

And the last thing - I think this may turn out to be the very mis-step by the Fed that I was cautioning about.

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