A(nother) brief moment on the Bear Stearns situation

[davelj]

Link to the most recent WSJ article:

http://online.wsj.com/article/SB120569598608739825.html

First of all – and this will be obvious to anyone who understands basic balance sheet accounting – if your equity is levered 30 to 1 (as apparently is the case at Bear Stearns), then if your assets are “actually” worth 3.5% less than your GAAP books indicate, well, your equity is worth just less than zero. So, if anyone’s paying a price above zero for the equity of this Black Hole of Risk (as I like to call the big investment banks and money center banks), then they must by definition be assuming that the “cash flow value” from certain Bear Stearns businesses (the custodial side, for example, among others) must be greater than the losses embedded in the on-balance sheet assets and off-balance sheet liabilities. I don’t pretend to know if this is the case or not. I’m just offering up a blinding glimpse of the obvious, yet at the same time scratching my head.

Second, I’ve conducted a fair number of bank-related due diligence projects in my career, albeit primarily on small banks (of less than $500 million in assets). These are pretty simple companies. And yet a team of a dozen people will still need about a week to conduct a proper due diligence. And a definitive merger agreement will generally take at LEAST another two weeks to craft. That’s for a simple, small bank. So, now imagine the complexity of doing due diligence on a company of the size and complexity of Bear Stearns. I think in a standard acquisition of a large investment bank (that is, one that’s not under duress), you’d probably need at least a month to complete due diligence and it would involve a hundred or more people. And JP Morgan, et al are expected to complete theirs in three days? This is completely ludicrous.

Which leads me to believe that either (a) the Fed will “backstop” this acquisition; that is, it will be forced to assume losses above a certain level for the acquirer in order for the deal to happen, or (b) the acquirer is going to slash and burn values on Bear Stearn’ business and balance sheet to create huge margin of safety in the purchase price. (b) makes all the sense in the world. But, back to my original point, here’s the rub with (b): How do you get to a margin of safety if Bear is leveraged 30 to 1? It doesn’t seem possible… which brings us back to (a)…

Anyhow, should be interesting.

[TheBreeze]

I think options (a) and (b) are both likely (at least based on what I’ve read). And what about option (c) Lehman, the potential buyer in this case, owns securities that are similar to securities owned by Bear and these securities are “marked-to-model”. If Bear is forced to sell these securities in a fire sale, these securities would have to be marked-to-market and now Lehman is looking at bankruptcy.

Dow 10,000 on Monday?

[TheBreeze]

I think options (a) and (b) are both likely (at least based on what I’ve read). And what about option (c) Lehman, the potential buyer in this case, owns securities that are similar to securities owned by Bear and these securities are “marked-to-model”. If Bear is forced to sell these securities in a fire sale, these securities would have to be marked-to-market and now Lehman is looking at bankruptcy.

Dow 10,000 on Monday?

[TheBreeze]

I think options (a) and (b) are both likely (at least based on what I’ve read). And what about option (c) Lehman, the potential buyer in this case, owns securities that are similar to securities owned by Bear and these securities are “marked-to-model”. If Bear is forced to sell these securities in a fire sale, these securities would have to be marked-to-market and now Lehman is looking at bankruptcy.

Dow 10,000 on Monday?

[TheBreeze]

I think options (a) and (b) are both likely (at least based on what I’ve read). And what about option (c) Lehman, the potential buyer in this case, owns securities that are similar to securities owned by Bear and these securities are “marked-to-model”. If Bear is forced to sell these securities in a fire sale, these securities would have to be marked-to-market and now Lehman is looking at bankruptcy.

Dow 10,000 on Monday?

[TheBreeze]

I think options (a) and (b) are both likely (at least based on what I’ve read). And what about option (c) Lehman, the potential buyer in this case, owns securities that are similar to securities owned by Bear and these securities are “marked-to-model”. If Bear is forced to sell these securities in a fire sale, these securities would have to be marked-to-market and now Lehman is looking at bankruptcy.

Dow 10,000 on Monday?

[davelj]

Yup, Breeze, I think you’re right:

http://online.wsj.com/article/SB120569598608739825.html

$2/share in stock (to add insult to injury). Whoa, Daddy.

From the article:

“One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets — such as its prime brokerage business that caters to hedge funds — Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm’s exposure, said people familiar with the matter.”

Uh huh… “certain assurances that would protect his firm’s exposures.” I think we know what that means. Looks like we taxpayers will be funding Bear Stearns’ losses after all. It sure as hell ain’t gonna be JP Morgan Chase. Dimon’s no dummy… for now at least. He had Bear and the US taxpayers (via the Fed) over a barrel… and boned all of us. Well done.

[davelj]

Yup, Breeze, I think you’re right:

http://online.wsj.com/article/SB120569598608739825.html

$2/share in stock (to add insult to injury). Whoa, Daddy.

From the article:

“One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets — such as its prime brokerage business that caters to hedge funds — Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm’s exposure, said people familiar with the matter.”

Uh huh… “certain assurances that would protect his firm’s exposures.” I think we know what that means. Looks like we taxpayers will be funding Bear Stearns’ losses after all. It sure as hell ain’t gonna be JP Morgan Chase. Dimon’s no dummy… for now at least. He had Bear and the US taxpayers (via the Fed) over a barrel… and boned all of us. Well done.

[davelj]

Yup, Breeze, I think you’re right:

http://online.wsj.com/article/SB120569598608739825.html

$2/share in stock (to add insult to injury). Whoa, Daddy.

From the article:

“One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets — such as its prime brokerage business that caters to hedge funds — Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm’s exposure, said people familiar with the matter.”

Uh huh… “certain assurances that would protect his firm’s exposures.” I think we know what that means. Looks like we taxpayers will be funding Bear Stearns’ losses after all. It sure as hell ain’t gonna be JP Morgan Chase. Dimon’s no dummy… for now at least. He had Bear and the US taxpayers (via the Fed) over a barrel… and boned all of us. Well done.

[davelj]

Yup, Breeze, I think you’re right:

http://online.wsj.com/article/SB120569598608739825.html

$2/share in stock (to add insult to injury). Whoa, Daddy.

From the article:

“One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets — such as its prime brokerage business that caters to hedge funds — Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm’s exposure, said people familiar with the matter.”

Uh huh… “certain assurances that would protect his firm’s exposures.” I think we know what that means. Looks like we taxpayers will be funding Bear Stearns’ losses after all. It sure as hell ain’t gonna be JP Morgan Chase. Dimon’s no dummy… for now at least. He had Bear and the US taxpayers (via the Fed) over a barrel… and boned all of us. Well done.

[davelj]

Yup, Breeze, I think you’re right:

http://online.wsj.com/article/SB120569598608739825.html

$2/share in stock (to add insult to injury). Whoa, Daddy.

From the article:

“One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets — such as its prime brokerage business that caters to hedge funds — Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm’s exposure, said people familiar with the matter.”

Uh huh… “certain assurances that would protect his firm’s exposures.” I think we know what that means. Looks like we taxpayers will be funding Bear Stearns’ losses after all. It sure as hell ain’t gonna be JP Morgan Chase. Dimon’s no dummy… for now at least. He had Bear and the US taxpayers (via the Fed) over a barrel… and boned all of us. Well done.

[davelj]

This is from the postings over on Calculated Risk:

***********
Marcus Aurelius writes:

Transcript of final 30 seconds of negotiations:

BSC: Two.

JPM: One

BSC: Two.

JPM: One

BSC: Two.

FED: JPM, we’ll back you.

JPM: Okay, two.

**************

Bwhahahahahaha!!! Or is it boo hoo hoo hoo hoo? Hard to say.

[davelj]

This is from the postings over on Calculated Risk:

***********
Marcus Aurelius writes:

Transcript of final 30 seconds of negotiations:

BSC: Two.

JPM: One

BSC: Two.

JPM: One

BSC: Two.

FED: JPM, we’ll back you.

JPM: Okay, two.

**************

Bwhahahahahaha!!! Or is it boo hoo hoo hoo hoo? Hard to say.

[davelj]

This is from the postings over on Calculated Risk:

***********
Marcus Aurelius writes:

Transcript of final 30 seconds of negotiations:

BSC: Two.

JPM: One

BSC: Two.

JPM: One

BSC: Two.

FED: JPM, we’ll back you.

JPM: Okay, two.

**************

Bwhahahahahaha!!! Or is it boo hoo hoo hoo hoo? Hard to say.

[davelj]

This is from the postings over on Calculated Risk:

***********
Marcus Aurelius writes:

Transcript of final 30 seconds of negotiations:

BSC: Two.

JPM: One

BSC: Two.

JPM: One

BSC: Two.

FED: JPM, we’ll back you.

JPM: Okay, two.

**************

Bwhahahahahaha!!! Or is it boo hoo hoo hoo hoo? Hard to say.

[Author]

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