Surprise! That’s what I said when I read over the weekend that J.P. Morgan announced they would buy Bear Stearns for $2 a share. Yes, that’s not a typo.. $2 a Share. The total deal is worth 236.2 Million.
One thing I must bring up, is an experience I personally had with Bear Stearn’s about 12 months ago. Bear had a mortgage wholesale department, which I had a working relationship with. I had a borrower with over 100 properties financed in Iowa and I was looking for a 70% refinance (no cash-out) on a non-owner occupied deal, an extremely credit worthy borrower. They turned it down because they felt it was too risky. Wow. I was surprised then, I’m still surprised now (well, sort of). I can only say from my experience that Bear started to shy away from mortgage securities quite a while back.
I found this brief history of the value of Bear Stearn’s stock extremely interesting:
- March 14th, 2008 – $30/Share
- a week ago – $60/Share
- a year ago – more than $150/Share
‘The $2-a-share price represents 2.4% of Bear Stearn’s fourth-quarter 2007 book value per share of $84.09, Oppenheimer analyst Meredith Whitney said in a research note Monday.’
One interesting addition to an already surprising story, is the Federal Reserve;s move to provide as much as $30 billion in financing for Bear Stearn’s less-liquid assets (like mortgage securities!) which they have been unable to sell. This is believed to be the largest advance of money to a single company. The exact financing terms or assets involved have not been announced from the Fed.
More importantly, I’m discussing this move because it will drive the market today. Currently (at 7:30am CST), futures are down 221 pts. Overnight, stocks fell sharply in Asia and Europe. It could be ugly as investors assess what could only be called a fire sale on Bear Sterns and a ‘bail out’ from the Fed. We know what happened globally overnight, what will happen here?
Quick Mid-Day Update:
I found an interesting summary of Bear’s Risk Positions. Here’s the breakdown:
- CMBS (Commerical Mortgage Backed Securities) – $16 Billion
- Prime and Alt-A Mortgages – $15 Billion
- Subprime – $2 Billion
- Total – $33 Billion
As far as the market goes, DOW is down about 48pts. Financial stocks are pretty weak on the news over the weekend:
- Lehman Brothers down 18%
- Goldman Sachs down 7%
- Morgan Stanley down 8%
- Merrill Lynch down 8%
Mortgage Backed Securites are up 50bps, so rates open for the better. We’re currently up against a strong level of resistance.. so things could get pushed further down (rates increasing). Watch technical factors today to decide which direction things will go!
