The likelihood of Bear Stearns remaining independent after being bailed out by the US Federal Reserve is remote.
Any white knights would want to buy at such a low price, that it would be derisory: the best bet is for the business to be broken up. Where that leaves its 14,000 employees is another thing.
There are reports in the US this morning that bear Stearns will be sold to JP Morgan for $US2.2 billion. JP Morgan is the conduit the US federal reserve has used to funnel emergency funds to bear to keep it afloat.
The bailout has once again confirmed that even though the likes of these big investment banks are not directly covered by US banking laws, which would enable the Fed to run the bailout, they are in effect just too big to be allowed to fail and potentially cripple the financial markets.
A financial group with an estimated $US43 billion in trading and other securities (bonds, subprime mortgages, credit derivatives, swaps) was just too big to be allowed to fail: the knock on effect could have flattened world markets.
As it is the bailout and downgrading of Bear Stearns’ credit rating to Baa1 from A2 by Moody’s will add another layer to cost and concern for potential creditors.
It obviously stunned Bear Stearns management who spent the weekend talking privately (according to strategically placed leaks) about selling part or all of the bank to a major investor (a sovereign wealth fund) or perhaps a staged break up of the bank.
The US Treasury Secretary, Hank Paulson was on TV three times yesterday in the US reassuring markets and the public that the Bush Administration had the situation under control. He strongly supported the Fed’s move.
It is thought likely that the sale will be announced before markets open in the US tonight.
The management was reported seeking long-term funding from a number of sovereign wealth funds in a bid to stay in business, according to London media reports.
The poor folk at Bear Stearns don’t understand that it has no credibility any more, just as its two failed hedge funds last June had no credibility after failing.
Bear Stearns refused to bail those funds out and it is going to suffer the same fate. The Wall Street Journal reported at the weekend that one big US money manager withdrew all the $US25 billion it had placed with Bear Stearns to manage in the past couple of months.
Friday’s bailout by the Fed, working through rival, JP Morgan Chase, means Bear is bound for the break-up yard. The board and management of Northern Rock, the failed UK mortgage bank claimed it would recover and return to business, but the fact was that no one trusted it, especially as the credit crunch ground on and it has now been nationalised by the UK Government.
If Bear Stearns wants to raise money, it could return to the negotiating table with Chinese group, Citic Securities. But Citic indicated at the weekend that it might not be interested in pursing a deal revealed last year that would have seen it buy around 6% of the US investment bank for around $US1 billion.
China’s largest listed brokerage told Reuters that it would "conduct an overall evaluation" of the deal after Bear, saying its liquidity position had worsened, obtained on Friday an emergency funding arrangement with the US Federal Reserve and JPMorgan Chase.
"We cannot guarantee reaching a final agreement in the future," it said in a statement emailed to Reuters in response to enquiries.
Likewise British forex dealer, Joe Lewis, could lose most of the $US860 million spent on his 9.4% stake in Bear after the share price collapsed in the wake of the bailout. The shares plunged 57%. He was a big buyer of the stock above $US100 a share, then around $US90 a share late last year. Now the shares are around $US35.
The Fed, Morgan Stanley and Bear Stearns have not revealed how much money was involved in the bailout.
Several US analysts say that at the end of December Bear Stearns had around $US35 billion in short term credit lines and liquidity, which were almost double its short term liabilities. Friday saw an unknown amount of money pumped in to the bank to save it. The withdrawal of $US25 billion, plus several billion from other fund managers obviously crippled Bear.
Just as its a sin to concentrate your investments and liabilities in one or two big positions or companies, its also a sin to been too dependant on a small number of fund managers/investors who have advanced a lot of easily withdrawable funds.
By coincidence, Bear Stearns problems became apparent on the 75th anniversary of the day when American banks reopened after the holiday declared by President Roosevelt when he took office in 1933.
The rescue of Bear is not permanent — the loans are for only 28 days — and American media reports say there is an expectation that authorities will seek to arrange for Bear to be acquired, perhaps at a low price, or that it will be broken up and sold to more than one buyer.
That’s why there was a flurry of leaks in the US and London on the efforts being made to find new shareholder/s with deep pockets, or buyers for the best parts of the business, including its prime broking business which services hedge funds.
Will Bear Stearns, through its private equity business, be able to complete the $116 million offer for Macquarie Private Capital that was announced last month? It’s at $1.06 a share which was a rich 56% premium to the then market price.
Bear reported a $US854 million fourth-quarter loss, the first in the company’s history. It has advanced the release of its first quarter figures from March 20 to tonight, Australian time. It had over $US2.5 billion in loses and write-downs on poor subprime mortgages and their associated credit derivatives.
Rivals, Goldman Sachs, Morgan Stanley and Lehman Bros are all due to report quarterly results this
