March 16, 2008

Two Bear Shares Now Equal One Cup of Coffee

J.P. MORGAN & CHASE CO. has agreed to buy the ailing Bear Stearns investment house for the stock equivalent of $2 a share, according to the Wall Street Journal and plenty of other news outlets. No, that's not a typo. $2 a share. Two. As in, $2 will buy you two-thirds of a gallon of gas, or $2 will buy you half of one of those fancy coffee drinks at Starbucks. That $2.

My reaction can be summed up as follows: Holy Mary Mother of God.

Oddly, the headline on the WSJ's piece says, "J.P. Morgan Rescues Bear Stearns." I don't know about you, but if anyone in future ever tries to rescue me in the same way -- please, let me drown and kick me in the teeth as I go over the waterfall. $2 per share is not a rescue. $2 per share is a calculated, cunning, brutal and utterly ruthless offer. It's the Wall Street equivalent of some Soviet commissar in World War II going into a failed general's office, and offering him a gun with one bullet in it. It is absolutely and totally merciless. It is also completely and totally brilliant.

This, by the way, would make me very happy if I was a shareholder of the J.P. Morgan & Chase Co., because Bear Stearns did have a book value of $80 per share. (Their building alone is worth more than $1 billion). After all, it seems unlikely J.P. Morgan would buy into the thing if it was too toxic, and they're getting Bear Stearns for practically nothing. Sadly, I am not.

I would be absolutely furious, however, if I was a Bear Stearns shareholder. I mean, can you imagine how people are reacting right now, learning they're getting two bucks a share? Thank God, though, I am not one. The destruction of wealth that's occurred here is incredible. I mean, my God -- can you imagine it? A week ago, shares in this company were worth $70. $70! It reminds me of some old verse from France back in the 18th century, after the Mississippi Company scandal broke:

My shares, which on Monday I bought
Were worth millions on Tuesday, I thought
So on Wednesday I chose my abode
In my carriage on Thursday I rode
To the ballroom on Friday I went
To the workhouse next day I was sent.

Of course, we are enlightened these days, and we do not have workhouses any more. This may or may not be comforting to the poor bastards who now find themselves in a world of complete and utter pain.

The deal values Bear at roughly $236.2 million. At $2 per share, that works out to 118.1 million shares. These shares were once worth $169 each, back in the good old days of January 2007. At that rarefied price, Bear was worth just under $20 billion. What an amazing collapse; what an incredible destruction of wealth. Although the effects won't nearly be as bad as it would have been if Bear collapsed, the cascading effect of the per-share drop from $70 to $2 in a week could still be considerable for the larger economy. When you wipe out $8 billion in wealth in a flash, it can't be anything other than painful. According to Bloomberg, some of Bear's larger shareholders have lost unimaginable sums of money. One guy supposedly lost more than $1 billion. Yes, with a B.

As for the little guys -- well, God help them. The WSJ says:

Many well-known investors, from billionaire Joe Lewis to Bruce Sherman, the head of Legg Mason Inc.'s Private Capital Management Inc. money-management firm, have seen the value of their stakes in Bear Stearns plummet. The pain could be most acute for Bear Stearns's employees, who are steeped in a culture of personal ownership -- and hold about a third of the firm's shares outstanding.

Wow. A third.

I feel really bad for the back-office and middle-office guys at Bear. God knows I have no inside knowledge of anything going on there, but in big collapses like this, it always seems like the little guys and the middle guys are the ones who get squeezed like an overripe grapefruit. Plus, they're the ones who tend to get thrown overboard first should any job losses -- which the WSJ seems to think pretty likely -- come down the pike. Of course, the senior guys are almost certainly feeling a lot of pain too -- how much of their money, one wonders, was tied up in Bear stock and its options? But you'd think they would have an easier time landing on their feet elsewhere. Wouldn't they?

Of course, as for the rest of us -- hopefully Bear's troubles won't cascade too much, and the sale will right the overall Wall Street ship. Then again, Japan and Singapore are both off three percent right now in morning trading. Australia and New Zealand are down too.

You know, this could be a tough week.

Posted by Benjamin Kepple at March 16, 2008 09:53 PM | TrackBack
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