Why Has Bear Stearn's Stock Been Rallying?
Bear Stearns (BSC)
1 minute chart, March 17-18, 2008
>
>
Since the announcement of the $2 dissolution of Bear Stearns, the stock has undergone a puzzling rally. After gapping down 94% or so Monday morning, the stock of BSC traded up to $7+.
Floyd Norris posed the "Great market puzzle" of the day: Why was Bear Stearns stock trading so much above what Morgan plans to pay?
Today's WSJ notes that Bear's stock has soared 23%. Their answer: "bets that J.P. Morgan will have to pay more for the firm, setting the stage for a high-stakes game of brinksmanship with investors in one corner and the Fed and J.P. Morgan in the other."
I think that's wrong.
There is a simpler explanation, one that might surprise you: BOND HOLDERS are buying up Bears loose stock. As much as they can get.
Why?
THEY WANT TO MAKE SURE THE DEAL GETS DONE!
Imagine your fund owned a one billion dollars worth of Bear bonds (mark to market = $800 million). Isn't it worth buying 10 million shares or so at $3 - 4 or so dollars a share? You will get $2 per share in JPM stock, so buying it a few bucks over the takeover price isn't all that risky. Remember, insiders own 30%, and Joe Lewis also owns about 10%.
So as mad as the accumulation appears, its actually quite rational -- IF YOU ARE A MAJOR BOND HOLDER, and are doing this to capture voting stock. (All the other idiots buying BSC are pretty much fucked).
>
Bear Stearn Bond Issuances
Also on the case: Felix Salmon, David Neubert
As I have been saying, this was an orderly liquidation -- not a bail out. The Fed would have been embarrassed to have Bear Stearns go belly up on their watch -- even though the official coroner's pronouncement was a deadly cocktail of a love of mortgage backed securities mixed with weak risk management. The thinly traded mortgage-based paper got marked lower and lower because NO ONE ELSE WANTED THEM. That is what caused the run on the bank, and not any whisper campaign.
Quite bluntly, its tough to see who else can come in at any sort of premium. The structure of the JPM deal is unique -- they have the Fed's $30B backstop (no one else has that guarantee); They also are guaranteed Bear's HQ -- its essentially a break up fee if the deal does not go through (making Bear worth $1.1B less to anyone else).
>
UPDATE: March 19, 2008 9:48am
I just noticed the NYT has a piece on this same issue: It’s Bondholders vs. Shareholders in a Race to Buy Bear Stearns Stock -- They also state the total outstanding Bear bonds are $300B ...
>
Sources:
Quick Opening Reactions
Floyd Norris
NYT, March 17, 2008, 10:14 am
http://norris.blogs.nytimes.com/2008/03/17/quick-opening-reactions/
Bear's Run-Up Sets the Stage For Epic Clash
Speculators Ignite Rally, Driving Shares Up 23%;
Disbelief on Deal Price
MATTHEW KARNITSCHNIG and DAVID ENRICH
WSJ, March 19, 2008; Page C1
http://online.wsj.com/article/SB120588302940646809.html
It’s Bondholders vs. Shareholders in a Race to Buy Bear Stearns Stock
LANDON THOMAS Jr.
NYT, March 19, 2008; Page C1
http://www.nytimes.com/2008/03/19/business/19bear.html
Wednesday, March 19, 2008 | 07:00 AM | Permalink
| Comments (30)
| TrackBack (1)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/t/trackback/763/27224734
Listed below are links to weblogs that reference Why Has Bear Stearn's Stock Been Rallying?:
» Bear Stearns Bailout: It's Not Who You Think from Businomics Blog
The quick read from the press is that the purchase of Bear Stearns by JPMorgan Chase was a bailout. Jim Hamilton over at EconBrowser doesn't buy that story. He says, $2 a share is no bailout, but instead represents a [Read More]
Tracked on Mar 19, 2008 11:55:39 PM
Comments
Why don't the bondholders just buy Credit default protection on the bonds they hold. The price for such protection must have traded down now that JPM is standing behind Bear.
Posted by: Eric | Mar 19, 2008 7:55:14 AM
this argument makes sense, but it's not what's happening.
if one person, or just a few, controlled all the bonds, then yes it could happen. but bonds are so widely dispersed that there is no way a single bondholder can make a difference (without risking more on the stock than they could reasonably make on the bonds). Plus most bondholders are different folk than the equity holders.
i am pretty sure it's because this Joe Lewis guy, who has ~10% of the stock, has come out against the deal, and so there is some chance the equity holders can pull off a much higher bid by effectively putting a gun to the head of JP/the Fed. If i was a major shareholder, I know where I would tell JP to go at $2 a share (and I'm sure a lot of employees of BS who own stock feel the same)...and if I'd blown $1bn on stock at $100 or so, I'd certainly spend another couple hundred million to massively increase my stake to try and force a bid multiple times above where the stock was trading on Monday.
Posted by: the cds trader | Mar 19, 2008 7:58:16 AM
BR,
you put together a top-notch weblog, I only wish that the level of commentary, that you provide, was the considered the de minimus ante, as opposed to stretching the de maxima bound.
Posted by: Mark E Hoffer | Mar 19, 2008 8:02:26 AM
ah eric, if only arbitrage was that easy, i wouldn't need to work so hard!
bondholders could do something even easier than buy CDS if they didn't think JP would take them over...sell their bonds!
Posted by: the cds trader | Mar 19, 2008 8:03:39 AM
Also, short sellers could be involved. If you're short from $60, it doesn't really matter if you buy back at $2 or $6. That's a $58 profit compared to a $54 profit.
Posted by: nl | Mar 19, 2008 8:37:25 AM
CDS Trader has a point about the dispersion of bondholders but the BSC buyer list is long......add to their number the street and hedge funds who are largely winners in the near-equity default, no credit default scenario playing out. Why would cds short cover at 380 (700 last week) when JPM trades at sub 150. It is all about vote control and this may run for some time. White Knight?
Posted by: kd | Mar 19, 2008 8:49:06 AM
This has nothing to do with BSC, but Barry mentioned page views as a buy signal a couple of days ago. Here's another one I noticed last night:
Kudlow at Dow 14k: "Goldilocks economy". "Greatest Story Never Told".
Kudlow last night: "I just can't be bullish on stocks here".
I don't know who is a better fade, Kudlow or Pisani, but they're both money in the bank.
Posted by: Mike | Mar 19, 2008 8:56:53 AM
Ive been wondering about the Bearstearns deal.
Legally the company was never declared bankrupt. Without a court accepting a bankruptcy declaration most of this deal is extremely dubious.
How can the Fed NOT give any and every other buyer the £30B guarantee - failure to do so would be a clear case of corruption - "we only bail out our friends (that bribe us) from JP Morgan" !
Shareholders must have the final say.
Giving the building to JP Morgan would be contestable in court.
Interesting times await.
Posted by: Steve Bowles | Mar 19, 2008 9:03:44 AM
why has BSC rallied you ask? isn't it obvious? the trilateral commission controlled by the freemasons are acting in coordination with the bilderbergers along with skull and crossbones who are covering up the faked apollo 11 moon landings because it was the CIA that shot JFK and orchestrated 9-11 as a cover story for the aliens they are hiding in area 51. Or....you can go with the outlandish, difficult to believe story that there are some people that think the equity is worth $6. wacko's!
Posted by: craig | Mar 19, 2008 9:04:02 AM
Posted by: craig | Mar 19, 2008 9:04:02 AM
_______
You know what's far worse than a conspiracy theorist?
Someone who claims to know the unknowable, and derides others for not being as intellectually dishonest.
Posted by: Marcus Aurelius | Mar 19, 2008 9:11:19 AM
It's all these things and more. I hope that everyone noticed VISA priced above its range today. What a surprise! Some money for the banks.
Morgan Stanley CFO said they have already used the discount window at FOMC. More $ for their traders.
Watch oil today, If it is weak I would expect money to start to flow back into stocks. Just in time for quadruple witching tomorrow.
Posted by: Vermont Trader | Mar 19, 2008 9:11:48 AM
marcus....it was a joke. no derision or intellectual dishonesty going on. just a funny ha-ha. but you to be a patsy to not know the shares were being driven up by Bigfoot and Loch Ness monster spraying chemtrails from jets flying over the US.
Posted by: craig | Mar 19, 2008 9:18:58 AM
craig:
My apologies.
Posted by: Marcus Aurelius | Mar 19, 2008 9:24:06 AM
I think BR ripped his post from Vermont Trader's comments yesterday. Which is okay by me--I thought it prescient, too, and helped me understand what in world is going on.
It all seems such an insider's game. I'll just watch and try to learn.
Posted by: Donkei | Mar 19, 2008 9:26:00 AM
Donkei - I took that post from Colin Barr Fortune magazine.... sorry I had so much going on that I forgot to credit it..
It's a good blog
http://dailybriefing.blogs.fortune.cnn.com/
Posted by: Vermont Trader | Mar 19, 2008 9:40:30 AM
Vermont Trader,
Thanks for the reference. Looks like another good place to get info...
Posted by: Donkei | Mar 19, 2008 9:58:32 AM
this topic was done yesterday on a blog over at WSJ
Posted by: BPM | Mar 19, 2008 11:23:33 AM
correction make that the NyT
Posted by: BPM | Mar 19, 2008 11:25:23 AM
sorry, didnt see the update
Posted by: BPM | Mar 19, 2008 11:31:30 AM
I'm a bit skeptical of the bondholder-theory for this reason: even if you are a major bondholder, how do you determine how many shares of BSC you should buy, and at what price you should buy? There are too many unknowns. Do you just keep buying until your gut tells you it's getting too expensive? Because of the dispersion, no one can accumulate a decisive amount, and no one knows who else is holding the shares and how they will vote. So there's not enough information to set a rational buy price.
Posted by: Nathan | Mar 19, 2008 11:41:44 AM
People like Joe Lewis and Jimmy Cayne also have tremendous incentive to buy as much as they can. Lewis is looking at a $880 million loss if the deal goes through as planned. If he spends another $100 million buying up close to half of the remaining shares, he might just have enough shares to block the deal and negotiate a better offer.
Posted by: jag | Mar 19, 2008 11:47:21 AM
its not like BSC will go bankrupt if holders vote down the deal- either someone else will buy them, or JPM will shell out some more bucs, hence bondholders would be dumb to throw money at BSC shares....
Posted by: Bucket | Mar 19, 2008 12:28:42 PM
There is a reuters story out that Cayne is shopping for a white knight to take BSC at a higher price ...
What a sales pitch that must be
"Hi, I'm the guy who presided over the greatest implosion of a finance company in the history of the world, and I think you should launch a hostile offer against JPM and the Fed ..."
Posted by: rob | Mar 19, 2008 12:34:06 PM
Bowles...
Will this have legs?
TimesOnline
The SEC has already launched a formal investigation into trading in Bear Stearns shares leading up to its rescue acquisition by JP Morgan Chase on Sunday night.
'In an unusual move, the SEC issued a written statement yesterday outlining the remit of its inquiry into information that was disseminated in the market about Bear Stearns in the last two months.'
Posted by: SoNotInTheKnow | Mar 19, 2008 12:45:32 PM
Unfortunately we have closed our BEAR prime brokerage account a few months ago for reasons unrelated to liquidity concerns buy I would how much leverage BEAR now could provide on BEAR bonds, given their JPM backing.
One other thing I wonder is if any of the large hedge fund firms which pulled their accounts from Bear (Citadel, Rennaissance Technologies,...)
had put on large equity shorts on BEAR's stock at the same time
and if regulators will find out anything in this regard.
Posted by: Guenter | Mar 19, 2008 1:18:09 PM
BR,
In regard to Investment Banks now having defacto access to the Discount Window just like Commercial Banks....do the FED or Congress plan to regulate or restrict the activities of these Investment Banks?
It seems they now think they are going to get the same treatment as Commercial Banks, but I don't hear a word about any supervision or regulation.
Are you hearing anything on this?
Posted by: BG | Mar 19, 2008 1:56:08 PM
thanks for the laugh craig
"Reality What A Concept" Robin Williams
one of my 1st cassettes from Columbia House, sign on the dotted line, 14 free for 6 more at regular price plus SH
Posted by: Greg0658 | Mar 19, 2008 2:26:11 PM
One key piece is missing from the Bondholder buyer argument that, when included, lets it make more sense: options.
I just published on this at : A bondholder can buy the stock and create a synthetic short by buying writing calls and buying puts.
For a net cost of $0.35 per share, the bondholder can effectively buy voting rights on the deal. Suddenly starts to make sense.
Posted by: Stock Market Beat | Mar 19, 2008 2:29:28 PM
seriously
common laborers who work for a living are looking at this industry in a new light
ummmmm like ahhh
light speed awareness
ps - and I'm aware the trade industry is work
Posted by: Greg0658 | Mar 19, 2008 2:47:27 PM
520 Trillion phony #s
trying to corner the Frozen Orange Juice Market
NOT
really its the 50 Trillion Real Assets
Posted by: Greg0658 | Mar 19, 2008 4:03:43 PM
