by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Have we reached the bottom of the credit crisis? Not likely but we are definitely going through, what Barry Johnson calls, price discovery.
From The New York Times via Yahoo News:
JPMorgan Chase & Co (JPM.N) is in talks to increase its offer for Bear Stearns CosBear Stearns, (BSC.N) to $10 per share in an effort to pacify angry shareholders of Bear Stearns, the New York Times reported in its online edition.
“The Fed, which must approve any new deal, was balking at the new offer price on Sunday night after several days of frantic, secret negotiations,” the newspaper reported, citing people involved in the negotiations.
I said, earlier this week, that this deal may very well QUANTIFY the bottom:
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.
In my annual market report, I said:
Today, we can feel the bottom amidst the muddy waters. Tomorrow, we’ll be able to see it as those waters clear. Next year, we may very well have touched bottom and will be floating towards the surface; we just won’t know it until we’ve come up for air.
I’m not sayin’ it’s over, I’m just saying that the waters are getting less muddied.
Thomas Johnson says:
Brian: I don’t bet, but I still think the bean counter wins, unless the cowboy can find a Chinese/Arab/Venezuelan benefactor with cash. You see, the bean counter has a Fed guarantee in his lap under the table. The cowboy is going to have to show his cards and soon.
My take on this is that Bernanke is letting all the gunslingers on Wall St. know that yes, they are too big to fail, but the Fed will rescue them via loan guarantee/freebie handouts to their arch enemy, the federally chartered banks. This a potential first step in the Fed getting control of the money supply which they have been unable to regulate with any meaningful efficacy since Glass-Steagall was repealed. This could be the beginning of a hybrid nationalization of our banking system.
March 24, 2008 — 8:56 am
Brian Brady says:
I think the cowboy just won, Thomas. JPM quintupled its bid. While he lost…BIG time, he just got some of it back- that’s what I think he wanted.
The interesting part of your comment is the submission to the Fed for regulatory issues. As Federally-chartered banks become the vehicle the battered securities firms use, they will be subject to the Fed’s regulatory world. The culture of risk, so prevalent to Wall Street, will decline.
…and I don’t think that’s good. While the culture of risk got us into this mess, it’s bailed us out of a lot, also. Traders make for orderly and efficient markets; less market makers means higher prices to consumers.
While there has been a lot of criticism of the shadow banking system (securitized loans), there is no doubt that it has dramatically brought down the cost of capital to the consumer.
Good insight, Tom.
March 24, 2008 — 9:37 am
Michael Cook says:
Well said Brian. For all the critics talking about risk and Wall Street, its important to note that all trades have two parties. If it were not for Wall Street securitizing loans, mortgage rates would be significantly higher and banks would have to be much bigger. Wall Street takes risk and spreads it around to those more willing to accept it. Most of the time its win-win and sometimes its when lose. The people playing the game know the rules and accept them.
March 24, 2008 — 11:58 am
Thomas Johnson says:
There is absolutely no will to allow those who took the risks to fail. I am not privy to the reasons why, but my suspicions are that there are just too many counter parties that did sloppy due diligence (because the rating agencies were negligent) with other peoples’ risk averse money: the Norwegian villagers, bank reserves, municipal operating funds, and last but not least, all the pension funds.
We’ll know it’s really bad when Bernanke starts swapping the treasuries in the Social Security lockbox for Bear Stearns SIVs.
March 24, 2008 — 4:21 pm