by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Joe Lewis taught us all what the word “derisory” meant today when he described the Bear Stearns sale to JP Morgan Chase. Lewis doubts the shareholders will approve the sale to Jamie Dimon’s financial services powerhouse.
Joe Lewis invested some 9 figures in the cash-strapped investment bank, last year. Bear Stearns cried poor on Friday, cut a deal with Jamie, over the weekend, and announced the sale Sunday night. The Fed lent JP Morgan the money to buy Bear Stearns. President Bush and Treasury Secretary Paulson endorsed the deal by 10AM PST today.
Fortune rewards the swift, no? Of course, I can’t forward lock a loan with Chase because I can’t get a wholesale lending rep to stop by my office and get me codes for their website. I’m guessing if I offered the $300,000 loan for ten grand, I might get a better response from Chase.
Here’s the part we’re all forgetting. 30% of the Bear Stearns stock is owned by the employees and Joe Lewis own another 10%. Both these “stakeholders” are a tad more than pissed at the weekend looting that happened when the power went out at Bear. Thursday, the stated book value was some $80. The value of their headquarters’ building is eight bucks a share. Manhattan real estate was supposed to be holding up pretty well in this real estate decline. I “get” lowball offers but 20 cents on the dollar for the building and firm that comes with it?
I reported that this was an asset play for JP Morgan, last night; they certainly assume some risk with Bear’s mortgage-laden portfolio. I thought the offer was scary, not derisory when I saw it. A pit formed, in my stomach, when I thought that valuations were THAT low. If Bear Stearns, a respected securities form could be devalued THAT much by mortgages, what would happen to the economy?
Hunker down, folks! Hunker down for a heavyweight fight between Joe Lewis and Jamie Dimon. The currency trader versus the bean counter. The cowboy versus the storekeeper. If we’re fighting about WHERE the bottom is , today, the bottom might be just around the corner.
PS- If you read the PS on my first Bear Stearns post, it’s clear to see my bias, in this fight.
Kevin Tomlinson says:
Oh man, I wish they were bloggers, I could use another blog war. I know Mary McK. is just chomping at the bit for another juicy once herself. FYI, I’m laying off the mini-Diet Cokes; had too many from the last one.
March 17, 2008 — 8:51 pm
Robert Kerr says:
Got to feel bad for Lewis, buying all the way down from $160 to $40 and now getting bought out at $2 per. I don’t know how someone so experienced can be so blind to all the warning signs, but he was.
This is not your average downturn and it’s only just begun to go bad.
March 17, 2008 — 9:27 pm
Greg Swann says:
> I could use another blog war.
I know facts mean nothing to people when they take up this particular topic, but it is incumbent on me to point out three simple facts anyway:
I know you were running a very clever Brian Brady game at AR, but I wish other folks would just do whatever it is that they do, rather than making a lot of embarrassing noise about pushing us around. In the second place, we cannot be dominated. But in the first place, behaving like animals is self-destructive — the polar opposite of appropriate human conduct.
March 17, 2008 — 11:24 pm
Michael Cook says:
I dont feel bad for Lewis, he made an educated bet and he was wrong. Even the best investors are wrong more often than they care to admit, he just happened to get burned in a very public situation. He made his fortune doing the same thing years ago. This one bad investment doesnt make him an idiot, it just makes him human.
Additionally, as an investor you make money by betting against the market. Last time I checked there is no money to be made in hindsight.
March 18, 2008 — 7:14 am
Thomas Johnson says:
Brian: Joe Lewis is about to find out that the bean counter has lead in his boxing gloves. This deal will go down in a way that common shareholders have no say. Something like this: JP Morgan will buy a special issue of preferred shares that will out vote the common shareholders.
The Bear is dead. The Fed had to find a white knight that is a federally chartered bank so that the deal could be done under special Central Banking provisions. Does anyone believe that Bear Stearns is the only investment bank that has an obliterated balance sheet? I guess Beranke is sticking his finger in the dike to get past the elections.
Your cowboy just lost a poker game to a card counter with a royal straight flush. 😉
March 18, 2008 — 7:54 am
Brian Brady says:
Thomas,
I think you’re more correct than I am. I think Bear is worth more than two bucks a share. Like the REALTOR that lists a short sale low to generate offers, I think the “low bid” made by Dimon will incite some “price discovery”.
Price discovery is the important issue. Now, we’re trying to value the bottom; I don’t think $250 million is it.
Mike Cook, any thoughts or must you reserve public judgment (which is understandable)?
March 18, 2008 — 9:54 am
Brian Brady says:
Michael, never mind. You answered this question in the earlier post.
March 18, 2008 — 9:59 am
Thomas Johnson says:
Brian: I doubt we will see a bidding war, although I certainly hope so, because with no other bidders, we are getting a peek at how bad the derivatives portfolios are. Leveraged 30:1 at par with no bids and no cash to meet customer withdrawals. Clearly the leverage has cut the other way, but with Lehman turning non-catastrophic numbers today (probably with some helicopter money), maybe taking out the Bear is a message to the other investment banks that yes they are too big to fail, but the Fed’s lifeline has a noose on the end and includes wiping out their shareholders, their stock options and enriching the regulated money center banks.
If Bernanke keeps this up, he will be able to get the money supply more under Fed control than it has been in years.
March 18, 2008 — 10:47 pm
Michael Cook says:
Brian,
I think it is very important to understand the price that is ultimately paid for BS. Since every Investment Bank and every Major General Bank has at least some amount of Mortgage Back Securities, it will mean a revaluation of all of the companies.
More importantly, this will have to reveberate back to the lending market in terms of tighter lending standards and increase spreads (over prime, libor, etc.) for lending rates.
For the record, 30/1 leverage is not as aggregious as it sounds. Consider that this product was rated triple A by all the ratings agency. Triple A implies a high level of safety, low level of volatility and extremely low yields. In order to get a 20+% return on a 4-5% investment, leverage has to increase significantly. Unfortunately when it turned out these investments were extremely volatile, 30/1 leverage became insane and impossible to unwind.
If there is anyone to blame for this situation, it would be the horrific relationship between the ratings agencies and the investment banks. There is an inherent conflict of interest when a rating agency gets paid by the banks for ratings. Many times banks work with the agency to ensure the product gets an excellent rating, often educating the ratings agency on what they are doing. This system is seriously flawed.
March 19, 2008 — 12:10 pm