Market Question

[RonK]

Can someone explain to me (Mark ?) how Bear Stearns is trading at $7(ish) when JP Morgan is doing the buyout at $2? :confused:

I figured politico is the safest place for this sort of discussion.

[mrandy]

I'll do my best on this. Until the deal closes there is still speculation on both sides. There are decent sides to each case.
The people that have bid it up from the takeover are assuming it will fall through causing the fed to directly backstop Bear Stearns or that there will be a higher takeover bid on the horizon that can also earn the fed backing or that some of the literally hundreds of forthcoming class action lawsuits will pay fruit (blood from a stone).
I would be bearish here at 5. I don't see any issue with it dropping to 2.50 which still gives it a 25% something could happen premium. The reason why this was shoved down the pipe was that the only other current option once accounts and capital left Bear and they had to really start unwinding highly leveraged positions was bankruptcy. $2 / share is still better than $0 on the common stock which was the other offer on the table.
JP Morgan made an excellent deal, but were only allowed on board after showing a strong enough balance sheet (probably using the same accounting rules that toppled Bear Stearns). The book value was $80 / share, if you figure that it's only 3/4 okay (that's a 25% foreclosure rate) then it's a huge payday for them picking up something for 93% off. But it's not a paper problem, its a reserves problem. And everyone mispriced risk, didn't store enough reserve against losses and got destroyed when their tiny stake vanished on a 5-10% dip in the asset price.
It's a fantastic lesson that if you're going speculate in an sector that has a ton of uncertainty in the balance sheet to at least get some protections with puts.

[schaefe]

Wow...just like in my Accounting class! Nice!