Stock Picks

Re: BSC..Bear Sterns...Fire Sale.

Alex... — Sun, 06 Apr 2008 19:01:58 GMT

Yes, I know how to read. The mistake I made was giving you more credit than I should have. I assumed you knew the difference between an owner and a creditor, and what that means in terms of assumption of risk. However, you do not seem to understand this basic concept of finance.

As anyone who has taken an elementary course in finance or accounting would know, the equity holders are the owners and decision-makers of the company. The bond holders have only very specific claims on the company. In return for no claim on upside potential in the company, the senior debtors generally require first claim earnings for debt service, and assets in the event of liquidation / reorganization. So that is the deal; bond holders get made whole first for specific claims, equity holders get everything that is left. Simple really. Generally true under common law for hundreds of years.

Explain how the bond-holders "facilitated" the risk-taking of Bear, to such an extent they should share in the losses? Do the bond-holders share in the profits? Uh...no. Do the bond-holders get profit participation / equity kickers? No. Do they sit on the Board? Uh...no. Do they act as managers? No...never. So even though they get absolutely nothing on the upside, have no real say in the direction of the company, they should share the losses with the stockholders? Such thinking is simply bizarre to me.

By that logic, depositors of a failed bank facilitated excessive risk taking, and should take a loss. We should get rid of deposit insurance immediately! Yes, in theory you can say they are facilitators, but they are not decision-makers or participants in upside success. So why should they share losses with the equity holders? Should the landlord also share the losses with the equity holders? How about payroll, benefits, pension claims? Maybe all those "facilitators" should also share the losses? Aside from this being nonsensical, highly illegal, and completely without precedent in the laws of practically any developed country, it makes good sense!

Also, I would point out that in every bankruptcy (or non-bk) reorg I have ever heard of, the bond holders were made whole before the equity holders. Period. And it is no better if the company does not go into bankruptcy, as the bond-holders will force bankruptcy if they are not made whole.

KB, I wonder if it is you that does not know how to read. If you did, you could look up the things I have said, and then understand how these things work.

I am not going to talk to you about this anymore. It is frankly a bit depressing to me, to deal with such willfully ignorant behavior.

Re: BSC..Bear Sterns...Fire Sale.

KoalaBear33 — Sun, 06 Apr 2008 17:41:15 GMT

WilliamJ:
I respectfully disagree. The Fed did exactly what it needed to do.

I don't really have a problem with the FedRes preventing the collapse. My problem is that they are clearly showing favouritism to one party (JPM) and bailing out the bondholders who enabled Bear Stearns to take the risk in the first place.

I would have less of an issue if the (potential) $29billion benefit was divided across a consortium of banks or something. That's what happened to LTCM back in 1998.

A key component of Bear Stearns' problem is their 30x leverage which only existed because bondholders were willing to enable such debt issuance. By the FedRes bailing out the bondholers, this seemingly excessive leverage is still going to happen again.

Although I don't think it will happen, if Lehman Brothers (the #2 player in the questionable mortgages) collapses then the FedRes is going to have all sorts of problems due to what they did with Bear Stearns. I don't think LEH will fail given that the Fed window is open to investment banks right now but you just never know...

Re: BSC..Bear Sterns...Fire Sale.

KoalaBear33 — Sun, 06 Apr 2008 17:30:29 GMT

Alex...:

And of course the debt-holders are in a preferred position! KB, the fact this confuses you indicates you have no idea what you are doing, investing in any equity position. Owners have last claim on all assets. Period. End of story. If the equity holders were made "whole" (and I have no idea how one could even determine this), but bond holders took a loss in collection, all hell would have broken loose.

Can you read Alex? Where did I imply that debtholders have the same claims as shareholders?

My point is that, if the Federal Reserve was going to bail out Bear Stearns, it should NOT have bailed out bondholders any more than the shareholders. It sets a bad precedent when the goverment makes whole those who facilitated the risk-taking. The FedRes should not reward all the parties that took the risk in the first place (this basically means management, shareholders,and bondholders).

The FedRes made a mistake here in my eyes. Those who doubt it will come around to my view in a few years. Even now, many who were in favour are coming around to the view that the FedRes lost a lot of credibility after the takeover price was raised by JPM. If there is a run on Lehman Brothers, you will see why this was a huge mistake to begin with.

So to sum up, the FedRes should never reward the risktakers, which is basically mangement, shareholders, and bondholders. It also shouldn't favour one party (JPM in this case). I really don't see how anyone can justify the FedRes offering up to $29 billion in losses to JPM and not anyone else.

Re: BSC..Bear Sterns...Fire Sale.

Alex... — Sun, 06 Apr 2008 04:10:58 GMT

Well... My cynicism of the $30 billion in assets appears to have been excessive. Sorry, should have kept my own counsel until I knew the specific terms of the deal. We will see about a gain. Interest income is reasonable. The probability of a gain will be determined by future conditions of the mortgage and housing market. At this stage, who knows? But it does not look like a terrible deal for the Fed.

Here is the Fed New York description of the deal.

What reassures me most of all is that the Fed picked the $30 billion in assets, using fairly reasonable parameters. That is, investment grade securities, performing loans, etc. Also, the value of the $30 billion pool was supposed to be determined by market value. So if that is not "mark to model" then I think its safe to say that the initial collateral value is fairly conservative. According to the comments, the Fed will be required to adjust these annually. So I guess we will see how things go a year from now.

It is a bit of a strange deal to me, in that I don't understand why it was $30 billion that JPM wanted in this pool, but I guess it makes sense to someone.

Re: BSC..Bear Sterns...Fire Sale.

Alex... — Wed, 02 Apr 2008 23:41:27 GMT

lol! If the Fed (or the administrator) gets more than face for this $30 billion in crap, then I will eat my hat.

Here is the general structure as I understand it:

(Bloomberg) The assets will be placed in a Delaware corporation set up by the New York Fed. BlackRock Inc. will attempt to sell the assets to pay back the Fed and JPMorgan. The first $1 billion of losses, if any, will be charged to JPMorgan, and the remainder go to the Fed.

From other sources, it appears that the Fed can in theory make money from this from accrued interest, and any possible gains on sale. The former is clear-cut, and the latter will effectively be deemed "interest" to skirt any ownership issues. As I see this, it is basically a "non-recourse" loan to JPM, with recourse being to the pool of securities...not JPM after the first $1.0 billion. I have one unconfirmed source saying these are "10 year loans". I have no idea what that means yet.

Blackrock is not going to sell it now, that would be insane. My understanding is that this is MBS and "related items" (shudder), so when will there be a favorable market? 2011-2012? Ever? In the meantime is any / all of this performing as agreed? If not, it needs to be discounted down from face amount, which likely means a baked-in loss. What would you pay for a nonperforming loan? Ya think Bear wrote down the assets before this deal was made? I bet not! We know the Fed has no real idea what they bought, as they got an asset manager after this deal was cemented We do know that JPM passed on holding these...right? Do you think JPM just randomly picked assets for this pool? Oh no! They probably picked the BEST ones for the Fed, because they are on the hook for a whole $1 billion! lolol...

The Fed is as silly as anyone that bought Bear a few months ago, if they think gain on sale is going to happen. Yes, let's think about the potential gain! Let's not remember that we 1) have no idea what we have in this pool, 2) have no idea when the market will be favorable to sell what we have effectively "bought", and 3) the current owner of the company has given us a nominal "first loss" participation after passing on effective direct ownership themselves. lol...

Put lipstick on that wart-hog and take it out on a date if you want. But to me it is still 30 billion of crap (rounded up), and the Fed owns it.

As for the rounding error, the first billion is a nod in the direction of risk sharing, and that is about it.

I have a deal for you. I will buy LA for practically nothing. As for the toxic waste dumps, sewage and pending lawsuits equal to 30 billion, you take that. Just to be nice, I will take the first billion loss if that becomes a problem for you. As for the rest of the city, its mine.

What a deal! Think of the gains!

lololol....

Re: How can going long on this stock even be considered a "Judgement Call"?

EagleTed — Wed, 02 Apr 2008 22:45:14 GMT

Alex...:
Seriously, what was the thought process in your mind, to invest in this stock at the start of a financial crisis? Did you know something about the company that no one else knew? Was there some point of analysis that you had made, which was clearly superior and different than that made by practically anyone else? Or did your ego just tell you that this could not fail?
Sure we all make mistakes in the game of investing. But unfortunately, from what I have read in this string so far, I cannot agree with a designation of "mistake" in going long on Bear. It does not deserve that much honor as a poor decision. It was a blind gamble that did not pay off.
When I invest, I act on situations where I can see a bit more than conventional wisdom, where I can see absolute or (at least) relative value. If I am just buying something because I am just oh-so-certain of my infallibility, it is just a gamble.
In my opinion, the key distinction between investing and gambling is that the former is an exercise of reason over ego, and the latter is visa versa.

Good advice. Worth repeating, so I did.

Re: BSC..Bear Sterns...Fire Sale.

WilliamJ — Wed, 02 Apr 2008 20:52:18 GMT

Alex,

Actually, it's 29 billion of crap, as JP Morgan is on the hook for the first billion. Also, an orderly sale of the "crap" could fetch more than what the Fed paid. This according to the Fed's own testimony today.

Re: BSC..Bear Sterns...Fire Sale.

openhurdle — Wed, 02 Apr 2008 20:34:18 GMT

Alex...:

KB, the fact this confuses you indicates you have no idea what you are doing, investing in any equity position. Owners have last claim on all assets. Period. End of story

Alex,

Now OBrian will attack you defending poor Koala, claiming you're like a dog that barks with no substance as to why you bark... You know, Koala has a new lawyer in these forums...

Of course OBrian won't attack you; he just wanted to get even with me. You know, I've been disagreeing lately with his positions

Re: BSC..Bear Sterns...Fire Sale.

Alex... — Wed, 02 Apr 2008 19:55:48 GMT

To somehow try to prove that the Fed "screwed" the Bear shareholders with this deal is just hilarious to me. The Bear was a walking dead man, facing unfillable margin calls. Without the Fed intervention, they would have been liquidated. Period.

The only reason the shareholders got anything AT ALL is because the fed financed $30 billion of crap, and because the Fed was trying to prevent panic. If the market would have decided the matter, the shareholders would have gotten ZERO.

In a sense, that is actually a positive of being an equity holder. You can't lose more than zero, and this company's real net worth was a heck of a lot less than zero. When you can't pay your bills, you get liquidated out for a very low price. That is how it works. "Enterprise value" or other such intangible valuations are meaningless. THAT is why it is very dangerous to buy equity in a company circling the drain. Duh...!?

And of course the debt-holders are in a preferred position! KB, the fact this confuses you indicates you have no idea what you are doing, investing in any equity position. Owners have last claim on all assets. Period. End of story. If the equity holders were made "whole" (and I have no idea how one could even determine this), but bond holders took a loss in collection, all hell would have broken loose.

Sigh... maybe this is why some of you eagerly ran into this buzz-saw. You not only did not have any special insight on the situation, you just did not understand the rules of the game at all. Scary...really!

Re: BSC..Bear Sterns...Fire Sale.

WilliamJ — Wed, 02 Apr 2008 17:13:24 GMT

KoalaBear33:

None of you may believe it but the Federal Reserve made a horrendous mistake by legitimizing the looting of a company outside of bankruptcy courts. I'm generally a defender of the Federal Reserve but Ben Bernake made his first huge mistake on the job.

I respectfully disagree. The Fed did exactly what it needed to do.

Had the Fed not acted quickly, the market would have dropped precipitously Monday morning. We're talking down 20%--or more. Across the board. Everyone gets hurt. The innocent as well as the guilty. Some have suggested it would have made 1987's Black Monday look like a picnic.

To quote someone (Star Trek's Spock, I believe): The needs of the many outweigh the needs of the few, or the one.

But hey, if that kind of major market event doesn't bother you, then yeah, the Fed did the wrong thing.

William

How can going long on this stock even be considered a "Judgement Call"?

Alex... — Sun, 30 Mar 2008 17:36:54 GMT

Seriously, what was the thought process in your mind, to invest in this stock at the start of a financial crisis? Did you know something about the company that no one else knew? Was there some point of analysis that you had made, which was clearly superior and different than that made by practically anyone else? Or did your ego just tell you that this could not fail?

Sure we all make mistakes in the game of investing. But unfortunately, from what I have read in this string so far, I cannot agree with a designation of "mistake" in going long on Bear. It does not deserve that much honor as a poor decision. It was a blind gamble that did not pay off.

When I invest, I act on situations where I can see a bit more than conventional wisdom, where I can see absolute or (at least) relative value. If I am just buying something because I am just oh-so-certain of my infallibility, it is just a gamble.

In my opinion, the key distinction between investing and gambling is that the former is an exercise of reason over ego, and the latter is visa versa.

Re: BSC..Bear Sterns...Fire Sale.

MommaD — Thu, 27 Mar 2008 00:20:21 GMT

openhurdle:
I bought heavy in commodities, so you can imagine the fat gains I got. And not, I know we're not at the end of the commodities bull, as some might HOPE and claim in these forum.

I don't think we are at the end of the secular commodities bull market but the short-term bull market may have some downs once the fed takes inflation by the horns.

Re: BSC..Bear Sterns...Fire Sale.

openhurdle — Thu, 27 Mar 2008 00:16:05 GMT

MommaD:
ITA - the chain reaction that would have ensued would have been historical and devastating. The system is far too interconnected to let a big player fail.
Sucks if you're a BSC shareholder, but I am not so I am glad it ended the way it did.
If BSC failure teaches us anything at all it is - diversify and do not keep a large stake in your employer's stock.

I'm not in financial, and have not been in financial for months. I'm the type of investor that buys heavy in a sector early on in the bull and just ride it. I bought heavy in commodities, so you can imagine the fat gains I got. And not, I know we're not at the end of the commodities bull, as some might HOPE and claim in these forum.

I don't approve what the Fed is doing about bailing out financial firms in trouble. I'm sure BSC is and will not be the only one that the Fed will bail out. Oh and those loans the Fed says are for only 30 days, I bet they will loan this money for ever if necessary and keep renew the terms indefinitely. The Fed will just not allow bankruptcy, I think in the short run it'll work, in the long run it'll come back to hunt them

JMO

Re: BSC..Bear Sterns...Fire Sale.

MommaD — Wed, 26 Mar 2008 23:40:12 GMT

openhurdle:
EagleTed:

They'll get their vote.
Frankly, I wish the Feds and JPM had let them declare Bankruptcy. Teach Wall Street a lesson. Even if it would have damaged the rest of us enormously
Eagle, if you wish to have a depression, then BSC should have been bankrupt and not saved by the Fed. But the Fed will not allow a depression, therefore they will bail out any bank/firm in trouble of smelling bankruptcy

ITA - the chain reaction that would have ensued would have been historical and devastating. The system is far too interconnected to let a big player fail.

Sucks if you're a BSC shareholder, but I am not so I am glad it ended the way it did.

If BSC failure teaches us anything at all it is - diversify and do not keep a large stake in your employer's stock.

Re: BSC..Bear Sterns...Fire Sale.

KoalaBear33 — Wed, 26 Mar 2008 23:02:42 GMT

farmera1:

That hand you see is Bernanke's hand in your pockets. The FED (aka the tax payer) guaranteed the first $30 billion of this deal. I also see the offer has been raised to $10/share.

The deal was modified so that JPM picks up the first billion in losses, while the FedRes picks up the rest of the $29 billion... still almost the same though...

This whole thing seems a bogus to me. A closed door deal with the FED calling the shots. How's that for free markets. No other offers taken. Guaranteed with FED money.
Looks to me like the FED panicked, and maybe they had good reason to. Their thinking had to be if BSC goes down, lots of other stuff goes with it and maybe the whole system. It just shows me how unstable the whole system is and how close to imploding it must have come. Now the FED is loaning money to the investment "banks". Freddie and Fannie have had their collateral requirments reduced so they can buy more mortgages. TAF, etc are loaning money to banks. etc etc etc. Looks like panic to me.

I'm in the disinflation/deflation camp so I'm cool with the FedRes injecting liquidity. My understanding is that so far nearly all of it is sterilized (i.e. no net increase in money supply) so it won't cause inflation. The taxpayers may take losses but I'm not sure about that either. The Bear assets are likely very risky (it's basically the lower tranches of mortgage debt) but the other assets that the FedRes is accepting likely won't lead to big losses.

My problem is with the way the Bear Stearns Board of Directors were behaving and how the Federal Reserve favoured one party: JPM. The BSC board somehow managed to issue shares to JPM for almost 40% of the company without shareholder approval. This is highly unethical in my eyes!!! The BOD is supposed to represent shareholders! It is in poor taste for the BOD to issue huge amount of shares and give it to a preferred party in order to complete a takeover.

It's also bizarre that the Federal Reserve was willing to wipe out equity holders (this is ok--shareholders take the risk) but make the bondholders whole (BSC bondholders should also take losses). I'm actually shocked that the Federal Reserve will save the bondholders and not the stockholders. It doesn't make any sense at all.

JPM will come out of this smelling like a rose if they survive..........

It's probably conincidental but do keep in mind that JPM has the largest derivatives book on the Street. They are not leveraged like the investment banks, and most of their derivatives are likely "safer" stuff (like interest rate and currency derivatives) but you just wonder.

Every thing the FED is doing seems to be adding debt (lower interest rates, taking really doggey Mortgage backed securities as collateral for long term loans etc. . My advice is when you find yourself in a hole, quit digging.

Lowering rates is fine with me. Remember, some people out there are saying that we have a real estate bubble half the size of Japan's (although Japan's big bubble was in commercial real estate while the US one is in residential; also Japan had a huge stock market bubble whereas USA doesn't). Unless you want to end up in a massive deflationary recession or depression like Japan did, cutting rates is the right thing to do. One of the biggest mistakes the JCB did was to raise rates in early 90's--likely under political pressure. It was a disaster of epic proportions. Not only did it further aggrevate the real estate and stock market collapse, it also bankrupted many of the banks. The FedRes is right in steepening the yield curve and letting the banks make some money, while some of the pressure is removed frmo the consumers as well.

Having said all that, it's not the job of the FedRes to bail out anyone. They should facilitate liquidations but not favour select parties and offer free money. Sadly, they did just that with the Bear Stearns case. To make matters worse, the FedRes also indirectly trampled shareholder rights. If Bear Stearns faced an orderly bankruptcy or if it was offered to the highest bidder, they would have avoided most of the ethical questions. As it stands now, it looks like the FedRes is in the backpockets of JPM and loves to help board of directors who ignore shareholder rights!!!