Research Update: Bear Necessities
Bear Stearns (NYSE:BSC) found an adult (JP Morgan Chase) to buy it a stiff drink at the Fed’s discount bar. But few believe the transfusion will be enough to keep the firm going for long in its current form. The question becomes not whether, but who, will swoop in to pick up the pieces?
Portfolio.com’s Felix Salmon provides a nice rundown of the story so far. FT Alphaville adds some color, including the anagram Barren Asset and a list of Bear’s top ten shareholders, (at #3 the other Morgan: Stanley). Henry Blodget lashes Bear’s management and 24/7 Wall Street says Bear has lost control of its own destiny.
Friday afternoon, Standard & Poor’s lowered its long-term counterparty credit rating on Bear to A-3 from A-1 and placed the company on creditwatch-negative. S&P expects the funding to help Bear in the near-term but doesn’t address longer-term concerns and noted:
We also remain concerned about Bear’s ability to generate sustainable revenues in an ongoing volatile market environment.
In a report earlier in the week, Punk, Ziegel said Bear will need a new business model if it is to recover.
The firm says “Bear Stearns key strength in the old cycle was capturing the revenue growth in the mortgage markets. Its genius was to maximize the profits from this growth.”
“It built higher-than-normal margins because it built a new credit derivatives business around the old mortgage model. It found ways to use structured financial products that had high returns to replace the simple business of originating and selling mortgages.”
Unfortunately, Bear did not get out of the way fast enough.
Punk, Ziegel says Bear is unlikely to be able to compete as well as a prime broker. “The next domino to fall will be investment banking. Unless Bear can provide the full services in this sector that its peers are able to provide, it is less likely to pull down the big deals. It will operate with smaller clients in this business.”
It will be interesting to see what operating model Alan Schwartz, CEO, develops once he is finished putting out fires. It may be that finding a merger partner is the best solution.
Following an investor conference call today where the company acknowledged that the loan was a bridge to a more permanent solution, CreditSights indicated that they expect the company to be sold quickly:
We felt the takeaway message from the Bear Stearns conference call was that the liquidity facility is a temporary solution and the ultimate outcome is likely to be a sale of the entire company within a relatively short time frame.
The FT’s Lex says JP Morgan is in pole position to buy the firm. “It has the best insight into Bear’s operations. It is one of the few US banks that has weathered the credit storm in decent shape and has the financial flexibility to take on the exposures. And Bear has some businesses worth owning.”
Breakingviews.com thinks the Fed did the right thing in bailing out Bear. Not for Bear’s sake, but because of the counterparty risk. Writing in the Wall Street Journal, breakingviews also says few financial firms are in a position to take on Bear.
That suggests two options: Barclays Capital and Bear adviser JP Morgan. Bear, or parts of it, might be a decent fit for either. And with Bear’s shiny “world headquarters” just around a Manhattan corner from J.P. Morgan boss Jamie Dimon’s office, he could keep a close eye on it.
Neither do Sovereign Wealth Funds seem likely to step in. Indeed Reuters reports that China’s Citic Securities may not proceed with its deal to invest $1billion in return for a 6% stake in the company. Citic would get a much bigger chunk of Bear at today’s prices, but indicated in may take the orginally planned 6% stake, while paying less for it. Bank of China said it is unlikely to look for bargains among Western financial firms and “We certainly will not buy into institutions like Bear Stearns.”
New York Times Columnist Gretchen Morgensen thinks the Fed crosesd a line in not lettting Bear fail, like Drexel Burnham Lambert did. Noting that Bear is hardly deserving of a bailout, she asks: “What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year? Or all of the above?”
Regulators must do whatever they can to keep the markets open and operating, and much of that relies upon the confidence of investors. But by offering to backstop firms like Bear, who were the very architects of their own — and the market’s — current problems, overseers like the Fed undermine a little bit more of that confidence.
Venture Capitalist Roger Ehrenberg sees startling parallels with the demise of Long Term Capital Management.”We are seeing another LTCM-style bail-out, only with the Fed’s more active involvement,” he writes on his Information Arbitrage blog. He believes moral hazard will be skirted because equity will largely be wiped out. He laments the departure of former Bear chief Alan “Ace” Greenberg:
Why did Ace have to give up the reins? Ace was all about managing risk. It is hard to imagine this happening with him at the helm.
On the subject of Aces, Greenberg’s card-playing successor Jimmy Cayne clearly takes his new “non-excecutive” chairman role literally, the WSJ’s Dealbook reveals. While Bear was melting down, the former Bear CEO was in Detroit, playing in the North American Bridge Championship.
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March 21st, 2008 at 11:35 am
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