Bear Stearns Poll Results

The results from my first blog poll are in. Just as a reminder, the question I posited last week was "Why is Bear Stearns trading way above the JP Morgan offer price of $2.00 per share?" Forty four votes were recorded and the winner by a plurality was that "People are stupid." The results:

Short covering 4 (9%)
A higher bid will come 12 (27%)
Bondholders protecting themselves 11 (25%)
People are stupid 17 (38%)

As we all know now, a higher bid did come in, in this case from JP Morgan, the original bidder. So it would seem that people aren't that stupid after all.

New Poll on Bear Stearns

I just added a poll to the blog just to the right of this post. There have been many reasons offered to explain why Bear Stearns stock is trading way above the $2.00 per share offer (or $2.34 offer based on the closing price of JP Morgan on 3/18/08). Please vote, and if you have any other theories make a comment.

Bear Stearns Mystery Caller

I was just reading the JP Morgan - Bear Stearns transcript and read toward the end an exchange from a mystery caller that the transcript identified as an individual investor called "Brian."

Brian

I was just wondering how this valuation helps the Bear Stearns shareholders as they go through Chapter 11 and the orderly liquidation of the assets of the company?

Answer

I’m afraid you’d have to ask that question to Bear Stearns.

Brian

I vote not to approve this sale.

A disgruntled employee perhaps?

Bear Stearns sold for $ 2.00 per Share?

The Wall Street Journal is reporting that JP Morgan Chase is buying Bear Stearns for $2.00 per share. This must be a joke - the Headquarters alone is worth $1.2 billion, which is four times the reported deal value of around $226 million. Bear Stearns would be better off filing for Bankruptcy and then taking a chance that after it liquidates and sells its assets and settles its liabilities, it would return more than $226 million to shareholders. By the time Bear sold its assets the market for mortgage backed securities may even have unfrozen.

High-Grade Bonds ?

Definition - A bond with a rating of AAA or AA, the two highest ratings.

Bear Stearns dropped the bombshell today on investors in its two sub prime hedge funds. The company stated in a letter to investors that "the preliminary estimates show there is effectively no value left for the investors in the High-Grade Structured Credit Strategies Enhanced Leverage Fund and very little value left for the investors in High-Grade Structured Credit Strategies Fund as of June 30, 2007."

The real stunner, at least for me, was this line in the letter, where they gave the cause of the loss in the value of the fund,

“Unprecedented declines in the valuations of a number of highly-rated (AA and AAA) securities.”

Well, I’m sorry but AA and AAA securities don’t go from par to effectively nothing in a couple of weeks. Well maybe if you lever up 5 to 1 they do but someone at the ratings agency or Bear didn’t do their job.

So just imagine the meeting where Bear salesmen were pushing this fund on its clients.

“Well isn’t this a little risky?” said the client.

“Oh no, don’t worry, we only buy AA and AAA rated bonds,” said the smiling salesman.

“Oh, OK,” said the client

“We even put the words – High Grade – in the name of the fund to make you feel safe,” said the smiling salesman.

“Yes, but what about the word – leverage – that’s in there also?” said the client.
“Oh, don’t worry about it, we know what we are doing here. We are experts at this type of thing,” said the smiling salesman.

I even had to sit my wife down this morning and explain to her why this would never happen to the Hedge Fund where we have all of our life savings invested.

"I don't buy crap like this," I said.

"Well make sure you don't. I don't want to be working for a living when I am 70 years old," she said.