At its closing price of $30 a share on Friday, Bear Stearns was trading at a gaping discount to its reported book value of $80 a share.
The troubles at Bear Stearns have come quickly and savagely and hurt some of the putatively smartest money in finance. From Joseph Lewis, the Bermuda-based billionaire who bought $1 billion of Bear Stearns shares last summer, when the stock was trading at $100 and above, to William Miller, the vaunted value investor at Legg Mason, those who have wagered on a turnaround at Bear Stearns are many.
The demise of the hedge funds began a slow but persistent loss of market confidence in the bank. Such an erosion can be devastating for any investment bank, especially one like Bear Stearns, which has a leverage ratio of over 30 to 1, meaning it borrows more than 30 times the value of its $11 billion equity base.
“The public has never fully understood how leveraged these institutions are,” said Samuel L. Hayes, a professor of investment banking at Harvard Business School. “But the market makers understand this inherent risk. This is a run on the bank, just like Long-Term Capital Management, Kidder and Drexel Burnham.”
