Monday, March 17, 2008

$2 a share, $30 billion of protection

Who could have guessed these numbers. JPM is acquiring BSC for $2 a share when Bear's almost new 45 story headquarters just across the street is worth at least $8 a share. It doesn't take advanced math to see that without the building BSC's net assets and liabilities are being given a negative value. And this deal is backed up by a Fed guarantee of loss protection for JPM up to $30 billion. Talk about an emergency operation for the functioning of the financial system, nothing less. Counterparty chaos avoided for now.

There are lots of issues here:
---Will that $2 a share really stand up? This needs shareholder approval. For shareholders that owned stock a year ago trading at $130, two weeks ago at $70 and Friday at $30, what's their incentive to approve, or at least not try to sweeten the deal a little. One third of BSC shares are employee owned. Almost 10% is owned by an investor who today called the $2 price "derisory".
---The lawsuits are already being filed, as is usual in any event like this. Apparently, as the buyer of the whole firm and not just selected assets, JPM would assume any Bear liability. This could be a significant financial issue and perhaps was factored into the price. Is there any possibility that the Fed's $30 billion can be used for this contingency as well---sort of doubt it. The good news here for JPM is that there is seemingly no indication of anything fraudulent and it might be difficult to raise too much public ire in support of well paid New York investment bankers who lose their company investment value.
---Clearly BSC would have shut down today were it not for the takeover/bailout. As was stated here on Friday, Bear has some very good businesses and it had certainly over many years been viewed as a firm that knew its way around the fixed income markets. This is an alarming reminder that financial firms live on liquidity, and panic does not wait for things to work out.


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