Bear Stearns: RIP
Most of you don’t follow this stuff too closely, but allow me to note the passing today of Bear Stearns a quirky New York investment bank. Here is the New York Times story:JPMorgan Acts to Buy Ailing Bear Stearns at Huge Discount
Banking can be a fabulously rewarding business, but it can also humble quickly. Bear Stearns deserved to fall because of its incompetence and opaque activities in what were only a few months ago regarded as rock solid businesses. The housing markets crumbling effect have now taken down an entire bank in less than a few days. Bear Stearns share price was up in the $60 range earlier last week. It fell on rumors of trouble Friday to about $30. Now, on Sunday afternoon, JP Morgan Chase has agreed to buy the rubble for about $2 a share.
Think about that: if you were a Bear Stearns shareholder on, say, last Monday your shares were worth $60 each. Here we are on Sunday and you’re being told that they were really only worth $2.
That’s quite a steep discount!
The message for everyone left in the markets is severe: the assets of plenty of banks must be taken with a huge grain of salt. Book values are what banks report in their financial statements, they are calculated in all sorts of strange and wondrous ways
usually having little to do with what the assets are actually worth if they were sold immediately. After all banks generally do not want to keep their reported values in line with the volatile market because it would make their businesses appear more unstable than they are. Except of course when the bottom falls out of a market like it has in housing. Then it is not volatility but fundamental losses that the bank is trying to hide.
Did Bear Stearns lie about its book values? Who knows, although I suspect there may be legal fights over that issues shortly.
What we do know is that fixing a value on financial assets in a market characterized by the fear and panic that we have sen recently is next to impossible. Those bits of paper are only worth what someone will pay for them, and Bear Stearns shareholders have learned the hard way what happens if no one really wants to by them at all.
The American economy is in trouble. It is facing a credit crisis of confidence. No bank wants to lend, no one wants to borrow. With the money movers frozen the economy slows then stops. This kind of economic problem is the hardest to overcome and often the longest to cure.
Hold on … this recession could be nasty!
