by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Bear Stearns employees will wake up on St. Patrick’s Day and wonder about their future. JP Morgan Chase bought Bear Stearns, a venerable Wall Street institution, for about 2.5% of the firm’s stated book value. The sales price was just 20% of the value of the Manhattan headquarters alone.
How safe are the jobs at Bear Stearns?
Jamie Dimon, JP Morgan’s CEO, cut his teeth in the brokerage and banking business under Wall Street legend Sandy Weill. He rose with Sandy as Weill made his comeback move after being ousted as American Express’ Chairman. Weill took control of Primerica and leveraged it through acquisitions of Shearson Lehman (bought from his nemesis, American Express), Travelers Insurance and ultimately Citigroup. Weill, and protege Dimon, were able to build the empire through cost-cutting in the name of economies of scale.
That doesn’t bode well for Bear Stearns’ employees.
Like the Countrywide/ B of A merger, we have a culture clash ahead. Bear Stearns vertically integrated into the mortgage industry, eventually owning its own wholesale lending channel. Bear violated the “Chinese Wall” securities brokerage firms try to respect; they bought their customers. JP Morgan owns Chase bank, a VERY conservative bank that owns a mortgage operation. The bean counters just bought the cowboys and in this era of “fiscal responsibility”, the cowboys will be kicked off the range.
Jamie Dimon doesn’t own a ten gallon hat.
JP Morgan bought Bear for its brokerage operations not its mortgage banking business. The $82 discount to stated book value suggests that JP Morgan will keep the prime performing mortgages, for its Chase Manhattan Mortgage portfolio, and most likely rid itself of all other mortgage assets. They can afford a helluva lot of losses on those mortgage assets with the discount they got.
What’s that mean to the mortgage market?
Less liquidity. While Bear Stearns Mortgage was reinventing itself to be a conservative lender, they were aggressively pricing their loans. Less liquidity and elimination of the price leader means higher costs, long-term.
Like their Countrywide cousins, Bear Stearns Mortgage employees should be dusting off their resumes…
..and looking at Wells Fargo. Wells has an opportunity to own the mortgage market in 2009. Neither cowboys nor bean counters, Wells just became the “edgiest” lender in the marketplace, by attrition.
PS- If ANYBODY has an extra $100 million lying around, there will be a fortune made in non-prime mortgages. The demand is there, at low loan-to-values. Contact me– I’m game and my heroes have always been cowboys.
Michael Cook says:
Very ugly situation here. I am still wonder if this will be approved by shareholders. It would seem a fire sale of assets would net them more than this deal. The building at 47th and Madison, must be worth considerably more than this price.
Based on my brief interaction with some BS employees I can assure you they were already dusting off their resumes. This has been anticipated for quite some time, though I am not sure anyone could have anticipated $2 a share. Seems like there have got to be multiple ways to make money in this environment.
March 17, 2008 — 8:07 am
Doug Quance says:
I wrote about my horrible experience with Bear, Stearns a year ago… and I would never use them again.
As far as I’m concerned – they need to dust off those resumes.
March 17, 2008 — 9:31 am
Brian Brady says:
Michael-
Can you believe how fast Bush and Paulson “approved” the deal?
I heard the employees (they own 30% of the stock) and Joe Lewis may contest the sale, file BK, and hope for the best in liquidation; there’s a LOT of room between 2 and 84 bucks.
March 17, 2008 — 10:01 am
Robert Kerr says:
It’s almost time to scratch Manhattan from exceedingly short list of appreciating RE markets. Are there any left?
March 17, 2008 — 11:50 am
Craig Tone says:
Sadly, the Bear employees owned 30% of Bear stock and will now be laid off.
Here’s what Jim Cramer had to say last week about Bear.
http://www.redlasso.com/ClipPlayer.aspx?id=ae47b67d-2523-4946-a2ad-aadc68176f67
March 17, 2008 — 5:54 pm
Gordo says:
Check this
http://WWW.Bearsucks.com
March 17, 2008 — 9:26 pm
Michael Cook says:
A lot of people have been mentioning the $84 book value. For the record that is not the true value of the firm. Until everything is marked to market, it will be impossible to guess what the actual value of the firm is. I can assure you that it is considerably less than $84. Consider that most of the major investment bank writedowns have been in the billions and that Bear is one of the market leaders of leveraged loans, and that $84 moves a lot closer to $2 very quickly. I would not be surprised if the true value was in the low teens or perhaps $8-10 range.
More interestingly that would mean that all of the other I-Banks out there are worth a fraction of what they are trading at right now. Before you go shorting I-Banks, consider that markets dont always (if ever) revert to actual value. Its much more about perception. In this case the fact that JPM went up well over $2 a share and that BS is trading at almost $5 implies that the market knows BS is worth more than $2.
March 18, 2008 — 7:22 am
Brian Brady says:
“I would not be surprised if the true value was in the low teens or perhaps $8-10 range.”
That’s what I was looking for, Michael. I know your “guesstimating” (aren’t we all?) but I think it’s considerably higher than two bucks a share.
The HQ real estate is worth $8-10/share. Now, the contingent liability of leveraged CDOs, marked to the market, may very well be ($6-10) share, so that might be the piece I’m missing
March 18, 2008 — 9:58 am
Michael Cook says:
Brian,
Another question is whether the Fed will back any other bidders. If the Fed keeps the $30 billion in place for other bidders, it might even get up to the mid-teens or high-teens. Consider Joe Lewis, who has already put in a billion. He could probably buy the rest of the company himself or with the top five other investors in the company, use the Fed leverage to clean up the books, and come out with a huge profit. He is smarter than people are giving hime credit for. Nothing would surprise me in this situation. The only thing that would surprise me is if it actually closed at $2.
Note: The stock peaked at $7.10 today.
March 19, 2008 — 12:18 pm