Everyone knows by the now that Bear Stearns the venerable, bulge bracket, but not white shoe Wall Street firm basically went under earlier this week.
For those who prefer a more redistribution leaning economic system you love this story. When Wall Street goes into redistribution/zero sum mode its the best well oiled machine bar none. In fact there isnt a government on the entire planet that can redistribute cash and other assorted goodies faster, cleaner and more painfully than Wall Street. The Bear Stearns fiasco is a perfect example.
About two weeks ago Bear Stearns was worth around US$ 75 bucks a share giving the firm a market cap of around $8.5 billion. Monday morning this week the firm had been sold for US$2 valuing the firm at just over US$230 million. What happened in between? Lots of things but by the far the worst were, unfocused and inept senior management, a gutless board and old timers who should never have been allowed to hang around forever and keep interfering. Hello John Howard meet Ace Greenberg and Jimmy Cayne (the two previous CEOs who never left).
Heres a trader’s perspective of this tragic soap opera …
A week before the Friday massacre, rumours began to circulate that the Bear was in trouble. Conspiracy theories (quite possibly accurate but perfectly legal) circulated that the rumours were started by one major hedge fund that was a large customer of Bear Stearns (as well as keeping most of its assets there for safekeeping). It withdrew its assets held in a custody relationship citing (and loudly circulating) concerns that Bear was in trouble and didnt like the credit risk. While doing this they began to short stock in Bear. Other firms began to withdraw their holdings too and a bear attack on Bear began.
Meanwhile the recently named chairman (and self demoted old CEO) was away playing in a bridge tournament leaving the new CEO alone to handle the mess. Confidence began to disappear rapidly and sure enough it became self-fulfilling despite appeals from Bears spokesmen throughout the week that things were fine and dandy. By Thursday evening it became evident that things were not that fine or dandy and the firm was no longer liquid so a call was put through to the Fed by the JP Morgan CEO.
The Fed gave the firm a secure credit line for 28 days, which actually turned out to be for 24 hours as Washington and the Fed basically told the firm that it had to be sold that weekend. The Fed never liked Bear Stearns, which goes back to the long-term capital fiasco. At the time, Bear alone out of all the big firms refused to participate in the LTCM bailout of the 90s. Its well understood that the Fed never forgets and always pays you back if one doesnt accept an invite to a Fed party. Bear refused to put in even $50 million to that bailout which would have placed it in the smallest donation group. The Fed really does have a long memory.
The stock closed at around 30 dollars on Friday afternoon and the firm was then sold for $2 by the end of the weekend.
Who was the happy recipient of all that newfound wealth? JP Morgan it seems is now the new the Fed (teacher’s) pet.
For a heavy weekends work (as someone mentioned at Catallaxy) JP Morgan got a business that will deliver $1 billion in profits annually, a building that is worth around $1.5 billion slap in the middle of mid town Manhattan that they can move into without even changing the curtains. Apparently the JPM guys have already started to move office or are about to do so. They also receive a Fed guarantee wrap around the Bear assets such as subprime. The entire cost was/is about $6 billion that includes a provision for the inevitable lawsuits that will arrive from really pissed off shareholders who rightfully think this was the biggest grand larceny of the past 100 years or so. Damn straight it was.
The eternally grateful but showy JP Morgan shareholders lifted the value of the firm’s stock by 10% the following Monday exhibiting all the bad traits by ill-mannered people that dont know how to behave at a wake.
So in a few days the Fed helped redistribute around $5 billion of wealth from one Manhattan office to another with all the finesse of an ax murderer.
Two billionaires are no longer billionaires. Jimmy Cayne the former CEO/bridge player is no longer in the extremely rich club and a long time Wall Street speculator – Irishman Joe Lewis – isnt either. Joe was taught about but forgot the lesson that you never, ever, ever, ever average losing trades as he was buying all the way down.
Moral of the story and possible point to include in a business school case study:
- Get rid of dead wood as soon as possible in the upper ranks. Get them out of the building at all costs.
- If the Fed invites you to a party you had better go and if asked be very generous with donations, especially to the Feds bailout club.
- Dont ever think you have any friends on Wall Street that want to help you succeed or get out of trouble.
- If you’re really, really in trouble, dont even think about going to the Fed and just file Chapter 11 or its equivalent as you end up getting better terms.
- If you need a friend, buy a dog.
The tragic part is that lots of good people lost their jobs. And no, I dont mean just traders and investment bankers. Lots of administration and clerical staff are with a job in the biggest financial downturn in ages … About 12,000 of them in the end. This part is truly sad.
As an aside, recently quarter results from other investment banks reporting this week showed down but healthy profits and above market expectations. If only Bear had reported sooner.