17 March, 2008

Bear Stearns Fall from Grace

The story that will makes the rounds of the Investment Banking Boardrooms, and business school curricula alike, will be that of the fall of Bear Stearns (BSC). The once proud up and comer on Wall Street is now being scooped up for $2/share by JP Morgan Chase (JPM).

Just to put things in perspective, Bear's all time high was last year's $159/share, giving it a market cap of over $18Billion. The stock closed today down 84%! at $4.80, giving it a market cap of $560Million. JP Morgan's buyout offer values the firm even less at just over $200Million.

A Staggering almost 99% loss in value from highs reached less than a year ago. A dramatic fall indeed! Bear made headlines at the end of last week when it took on more debt to keep itself liquid. JP Morgan and the New York Fed provided financing to the troubled Investment Bank, as the news incensed the Street dropping Bear by almost 40%. News broke of the buyout on the weekend and Bear Investors had no chance to get out prior to open this morning.

The company's heavy write-downs from the mortgage crisis have left it battered, bruised and now forced to take on more debt. All that was left was for JP Morgan to pick up the pieces at a substantial discount. Although not much is clear about the shape of Bear's books, they probably have never looked worse. The $200Million buyout by JP was a clear indication that Bear was more than likely headed to bankruptcy protection and the firm behind the Chase banking brand felt like there are valuable assets worth salvaging.

It'll be interesting to see how it all plays out, as Investors cheered the "buying bargains" strategy of JPM, sending shares up 10% today. I think JP Morgan will be paying for this one for many months to come, not only with the write-downs that are surely to follow Bear's funds from this quarter to the next, but also the string of shareholder lawsuits that will ultimately find their way to Class-Action status.

Disclosure: Author holds no position in BSC, JPM

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