Bear Stearns - Firesale on Wall Street

Can somebody who understands high finance explain to me how the fuck an outfit like Bear Stearns could fall apart so fast?

Two months ago they were selling shares for something like $170. They got gobbled up yesterday for $2/share.

What does this mean to a common man like me?

If it means anything to you, you are not a common man

SC is actually an uncommonly common man.

"If we should bump into one another, recognize me."
-Robert Bolt
A Man for All Seasons

Hell, if we bump into each other, I've had too many to drink.

That is the closing line of the play, which were spoken by "the Common Man", who provided asides throughout the play. I think at the time he delivered this aside to the audience he was playing the role of executioner.

Anyway, this was the only line of the Common Man that I remember.

Bear Stearns got caught up in the sub-prime lending mess. Mortgate-related losses meant that (i) its assets weren't as much as it believed, (ii) the decline in asset value affected its liquidity so it couldn't pay bills as they came due and (iii) in such a state, nobody wanted to do business with it.

When a company's assets are worth less than its liabilities and if it can't pay its bills, the company is insolvent and its equity is essentially worthless. Voila - $2 per share. The market can only digest information that is available and as more and more information became available in regard to the nature of its assets and its potential liquidity problems, the stock price responded by going lower and lower. The $2 was just a tip to make the transaction go more smoothly (just so JP can say it paid something). They essentially got Bear for Bear's assumed liabilities.

What does it mean for you SC?

1 - It is one of the headline stories of the economic times that we're in. Housing is down, we're probably headed for a recession... On the upside, the economy will get better once we go through a rough patch.

2 - Diversify, diversify, diversify. When you invest, stick to index funds. Don't overload on one company, one sector... I feel bad for all those employees who lost their life savings, because they were overloaded on Bear stock.

Exactly, Sicilia. Value is a personal decision. There is nothing intrinsically valuable about gold. Yet, we are pricing it at $1,000 per once. Why? Because there are those who will pay that much to possess it. There are not many who want to possess Bear-Stearns stock. Thus, $2 per share.

Those who follow stocks do pay attention to underlying value such as value of the assets that a company owns. As Sicilia points out, many of BS assets have lost so much value that, upon liquidation, they would not retire BS debt.

Your entire answer was a great explanation, Don Sicilia.

I feel bad on a personal level for the people who lost their life savings because of Bear Stearns. Yet the Michael Corleone business side of me does not feel bad. If you have all your financial eggs in one basket, there should be no surprise if something like this happens. Especially in the light of the post Enron, World Comm, Tyco, et. al scandals. With the way the banks have been in the news so much over the past year, I'm surprised another Bear Stearns had not already happened.

Yet if your an employee and you get stock options as part of your "benefit package", do you really have a choice as to what you get??

I think it's horrendous the way these lenders got themselves into trouble. It was totally and completely irresponsible of them to lend money to people that they KNEW couldn't pay it back. It was unfair to their employees and their stockholders.

As for the people who are losing their homes, I do feel SOME sympathy for them, but not a whole lot. Whatever happened to saving your money until you could afford something? Instead of instant gratification??

What I don't understand (and perhaps it could be explained to me) is if JP Morgan Chase is buying out Bear Sterns, why doesn't the stock then become JP Morgan Chase stock??

When a company is acquired, all the shares of the acquired company are exchanged for the per-share offer price. Since the Bear Stearns deal is a cash transaction, cash is all Bear shareholders will get.

It's management like this that scares me about the whole market. I don't quite understand it, but I used to walk by the NY Stock Exchange on Broad St and see all those traders outside on their smoke break and I'd say to myself, .... I don't want the economy in the hands of those jerks.

Well, what goes down eventually comes back up. Glad the market came back a bit today. I think we are going to see up and down for at least the remainder of this year and probably a bit longer until the new President gets in (guess that's a whole other conversation!) Banks learned a hard lesson...just rode the wave too long and got rich too quick. Time will tell. Until then, trying to figure out what I will do on my summer vacation.

In 1980, the Dow Jones was under 1,000. Duh!

I just heard the head honcho of Bear Stearns sold his stock in the company. He got $61 million for it.

Last year it would have been worth $1 billion.

I don't feel sorry for him.

Aw, poor millionaire. I have to go open a fresh box of tissues.