Bear Stearns - Wow

**jDub** · 03-17-2008, 12:13 AM

JP Morgan has agreed to buy Bear Stearns for $2/share or about $236 million. This was a company that was worth about $3.5 billion in market cap as of Friday and over $20 billion just over a year ago.

The Fed also stepped in and provided $30 billion to JP Morgan to cover some of the assets of Bear Stearns as part of the deal. If those assets fall in value, guess who takes the hit, the Fed (your tax dollars).

It will be interesting to see if the stockholders of Bears Stearns put up a fight. Many have already expressed an opinion that they would get more than $2/share if they went through bankruptcy.

**alaskaguy** · 03-17-2008, 12:38 AM

If the company was worth more someone would have bid more. No other bidders offered as much as J.P. Morgan.

The individuals that approved the transaction for Bear Stearns were the largest shareholders and have the most to risk by not going with the best deal.

The market for the assets (collateralized debt obligations) that the Federal Reserve has "covered" is illequid. Valuing these assets is rather complex since it depends on default and repayment assumptions of the underlying assets.

In addition, the Federal Reserve is unlikely to take a loss on the sale of the CDOs. The price a CDO brings at a firesale versus a reasonable marketing time frame should protect the Fed. They can hold the CDOs until more favorable market conditions arise.

**jDub** · 03-17-2008, 12:53 AM

Yes, the inability to place a value on collateralized debt obligations leads me to believe that Bear won't be the last to fall. As an investor, it's disheartening to have very little notice that a company of this size is going to take a dive (due to the inability to value these assets). Even the credit rating agencies didn't cut Bear's rating until Bear itself came out and said they were in trouble.

Yes, it doesn't necessarily mean that the Fed will take a loss, but if I were a betting man I know where I'd put my money.

**alaskaguy** · 03-17-2008, 01:02 AM

The rating agencies didn't cut their ratings on CDOs until well after the public discovered the risks.

Lehman Brothers has significant CDO holdings and many pundits are forecasting that its share price will tumble once it opens for trading on Monday.

**alaskaguy** · 03-17-2008, 01:09 AM

Its difficult to value CDOs that are backed by sub-prime mortgages. The sub-prime market is relatively new. In addition, the nation hasn't encountered a housing market as weak as what is currently being experienced. How do you model something when you do not have any historical information to base your model on? If the real estate market picks up the CDOs backed by subprime mortages would gains substantial value but if the housing market continues to deteriorate or stays the same I would imagine that the values decrease.

**4429 mcc** · 03-17-2008, 03:29 PM

Talk about a kick in the nuts...man I think everyone of the employees that own the stock will reject the offer, but it wont help.

Half of Bear's 14,000 Employees May Lose Their Jobs - Financials * US * News * Story - MSNBC.com

"I've been at Bear for 11 years and I want to vomit," said a Bear Stearns employee, who described himself as a partner, as he entered the striking seven-year-old octagonal building two blocks from Grand Central Terminal.

**brianhos** · 03-17-2008, 03:39 PM

Originally Posted by 4429 mcc

Talk about a kick in the nuts...man I think everyone of the employees that own the stock will reject the offer.

Half of Bear's 14,000 Employees May Lose Their Jobs - Financials * US * News * Story - MSNBC.com

"I've been at Bear for 11 years and I want to vomit," said a Bear Stearns employee, who described himself as a partner, as he entered the striking seven-year-old octagonal building two blocks from Grand Central Terminal.

The problem is they built their entire portfollio around poor investments in mortgage backed securities. If the remaining employees/shareholders choose to vote no, then pretty much all of them will lose their jobs as the company goes into chapter 11 or more likely chapter 7.

**TykeClone** · 03-17-2008, 11:48 PM

Originally Posted by brianhos

The problem is they built their entire portfollio around poor investments in mortgage backed securities. If the remaining employees/shareholders choose to vote no, then pretty much all of them will lose their jobs as the company goes into chapter 11 or more likely chapter 7.

After the stock market bubble popped in 2001, mortgage backed securities were the place to be - especially if they were Fannie Mae or Freddie Mac securities. These have the implied backing of the federal government and are (were?) generally considered pretty safe.

The issue with Bear Stearns is that they have a bunch of that paper, but can't move it in order to keep their cash reserves in order. Once that happened, they were DOA.

**alaskaguy** · 03-18-2008, 12:23 AM

Originally Posted by TykeClone

After the stock market bubble popped in 2001, mortgage backed securities were the place to be - especially if they were Fannie Mae or Freddie Mac securities. These have the implied backing of the federal government and are (were?) generally considered pretty safe.

The issue with Bear Stearns is that they have a bunch of that paper, but can't move it in order to keep their cash reserves in order. Once that happened, they were DOA.

Default risk of a FNMA, FHLMC, or GNMA is negligible. The market in these securities continues to be brisk.

The mortgage backed market moved beyond GMMA, FHLMC, and FNMA into CMOs "collateralized mortgage obligations" and mortgage backed bonds in the early 1980's. In addition, subprime loans are packaged into pass-through securities and those pass-through securities are used to create CMOs.

Bear Stearns had a leadership role in the CMO business. They earned fees from packaging GNMAs, FHLMCs, FNMAs, and other pass-through mortgage securities into CMOs.

**Cyclonesrule91** · 03-18-2008, 03:57 PM

January 2007 Bear Stearns stock was worth $171/share.
Fridays stock dropped to a low of $30/share.
JP Morgan buys Bear Stearns for $2/share.

That is a major kick in the sack.

But this was building because it was a series of stupid decisions that brought this company to it's knees. Another Enron in the making?

**jmb** · 03-18-2008, 04:23 PM

Originally Posted by Cyclonesrule91

January 2007 Bear Stearns stock was worth $171/share.
Fridays stock dropped to a low of $30/share.
JP Morgan buys Bear Stearns for $2/share.

That is a major kick in the sack.

But this was building because it was a series of stupid decisions that brought this company to it's knees. Another Enron in the making?

COmparing Enron and Bear Stearns has very little merit, if any.

**brianhos** · 03-18-2008, 04:31 PM

Originally Posted by Cyclonesrule91

January 2007 Bear Stearns stock was worth $171/share.
Fridays stock dropped to a low of $30/share.
JP Morgan buys Bear Stearns for $2/share.

That is a major kick in the sack.

But this was building because it was a series of stupid decisions that brought this company to it's knees. Another Enron in the making?

Not a major kick for the shorts that saw it coming.

**brianhos** · 03-18-2008, 04:32 PM

Originally Posted by Cyclonesrule91

January 2007 Bear Stearns stock was worth $171/share.
Fridays stock dropped to a low of $30/share.
JP Morgan buys Bear Stearns for $2/share.

That is a major kick in the sack.

But this was building because it was a series of stupid decisions that brought this company to it's knees. Another Enron in the making?

Enron was an entire company built on a sham. Bear Stearns just made some really really really really bad business decisions in the last few years. Stupidity is not malice.

**Wesley** · 03-18-2008, 04:34 PM

Merrill Lynch is next up. When Carlisle Group collapsed they were levergaed by a factor of 32. They had $800M in real assets and 32 times more under their ownership. Guess that mean when people ask for their uninsured money back at a 3% of previouslyu stated valkue, the investment bank is kaput. I would not recommend anyone having their money in investment banks. Heard the Bear Stearn billionaire (1.5) is now a millionaire (14). One week to lose a personal billion. Buffett would say the guy walked the plank too many times and received his just punishment. Heard a partner who had billions lost a billion also. Paper value can erode fast. The govt has offered up $200B of their govt bonds and they can tap another $500B as collateral to give to the wilting investment banks. Then the govt starts printing more money and down goes the dollar. More pain to come. Hurry up and start the football season.

**alaskaguy** · 03-19-2008, 12:28 AM

Originally Posted by brianhos

Enron was an entire company built on a sham. Bear Stearns just made some really really really really bad business decisions in the last few years. Stupidity is not malice.

Bear Stearns was a leader in CMOs. The default rates on mortgages are higher than what Bear Stearns had assumed. Had the housing market not cratered, Bear Stearns would be a hero.