The Real Reason Bear Stearns Stock Is Well Over $2

Discussion in 'Stocks' started by ByLoSellHi, Mar 19, 2008.


    Daily Briefing
    By Colin Barr

    March 18, 2008, 11:42 am
    Why Bear Stearns stock is in orbit

    Why is Bear Stearns (BSC) up nearly 70% Tuesday, to a price about $6 a share above its $2-a-share buyout agreement with JPMorgan Chase (JPM)? Two groups are piling into the company’s stock so they can vote in favor of the deal, a trading source tells Fortune’s Roddy Boyd.

    The first group is the hedge funds that were selling so-called credit default swaps that protect the purchaser against a possible bankruptcy at Bear Stearns. Spreads on Bear Stearns CDS soared to 1,000 basis points Friday - meaning it cost $1 million to insure against a default of $10 million face value of bonds. Those spreads have since narrowed to around 350 basis points, or $350,000 per $10 million in insurance, in light of the prospect that JPMorgan Chase will take over Bear’s obligations. So a seller of a Bear Stearns credit default swap on Friday, having taken in $1 million in premium, can now turn around and protect himself against a default in Bear Stearns for $350,000. That translates into a $650,000 gain -and the potential profit stands to get bigger as the close of the transaction approaches and Bear spreads move more in line with JPMorgan’s, which are around 115. Those dynamics give hedge funds a big incentive to make sure the deal goes through.

    Beyond the credit default swap trade, there’s another group interested in making sure JPMorgan winds up owning Bear Stearns. Holders of Bear Stearns debt want the deal to go through so they won’t end up fighting with other creditors in bankruptcy court over the remains of the firm - the likely outcome if Bear shareholders turn the deal down. And Bear Stearns bonds that recently traded as low as 80 cents on the dollar could soon be worth 100 cents if JPMorgan goes through with its purchase.

    So while taking a loss on the stock makes little sense on the face of it, buying at $7 to get cashed out at $2 can pay off if you’ve bet enough money elsewhere.

    Why Is Bear Stearns Trading Above Deal Price?
    posted on: March 18, 2008

    I've been getting the inside scoop from some hedgefund traders (who always request to remain anonymous). One told me that the reason Bear Stearns (BSC) is trading so far above the deal price with JP Morgan (JPM) is that bond holders who NEED the deal to go through are buying millions in equity to save their billions in debt. The will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt. Also, the equity acts as a nice hedge. If the deal does not go through, Bear Stearns equity will go up a lot and the bonds will go down.

    JP Morgan's Jamie Diamond is extracting his pound of flesh from taxpayers (no one represents them) and equity holders in order to guarantee the debt of Bear Stearns.

    Lesson in hedge fund thinking:

    Equity up? The bank is being sold cheap at the expense of equity holders to protect bondholders. No deal means the equity can trade up speculation that another buyer with more time to analyze the company will pay up.

    Bonds Down? If JP Morgan walks away from its government subsidized guarantee, bonds fall.

    In the meantime, I've been buying Bear Stearns Preferred stock (BSC-PrG) as my own way of collecting some of that free government bailout money being handed out to hedge funds and JP Morgan.

    As I mention on, my favorite rant about the Bear Stearns giveaway can be found at Wall Street Weather. Felix Salmon asks a bunch more unanswered questions on Bear Stearns on his MarketWatch Blog at

    Disclosure: I own BSC (ouch). I am short a larger amount of 10 strike calls. I am long 15 strike calls. I own Bear Stearns Preferred Shares, BSC-PRG. I own JP Morgan (JPM). I am an unrepresented US Taxpayer.
  2. Great post. Fascinating, yet kinda scary. All those big dollar amounts, all from nothing more than paper being bought and sold.
  3. It definitely makes sense. Excellent find.
  4. eagle


    Once the reason has been revealed, the opportunity to make money is gone. News is always less important than the price action itself. IMO, focusing on price action is enough, the rest is just to satisfy your reasoning, not to satisfy the earning.

  5. You'll get no argument from me on that one. I've made that same argument to others.
  6. mokwit


    "Your business is with the tape"

    J.L. Livermore
  7. Ain't it the truth. I have guys call me, 'look at the fundies here', or 'this franchise is worth'......... Nice, for other folks. I unfortunately am well too aware of the underbelly of this beast, and this situation is a primo example.

    And don't you think the fast money guys at Bear won't start wacking that bid this afternoon. Six is better than two. At least it was yesterday.
  8. Thanks guys.

    The whole BSC issue has been really bothering me since it all spun out of control.

    I was trying to figure out what was behind the price action since 'the deal' was announced by JPM and the Fed.

    Too many things didn't make sense.

    I posted these two article because it sort of cued me in to a whole other aspect that has not been mentioned by the financial press herd, and because they seem to briefly yet accurately answer some of those questions.

    Excellent article by Mauldin, too, trader.
  9. And the employees own 1/3 of that stock apparently.
    #10     Mar 19, 2008