Novice Investing - Bear Stearns Getting Swallowed Raw

Date: Friday 09th 2008f May 2008 08:44:14 AM

Bear Stearns Getting Swallowed Raw - 03/17/2008

By: Hari Wibowo

A few days after Bear Stearns Inc. (BSC) received emergency funding from JP Morgan Chase, another news broke out. The same JP Morgan will be acquiring Bear Stearns for $ 236 Million or $ 2 per share. Last Friday, Bear Stearns shares plunged 40% to $ 30 per share. But by this monday, Bear Stearns has agreed to be bought out at $ 2 per share, which describes how dire the situation is in the past few days. However, JP Morgan was not buying without any risk.

As we elaborated last Friday, the amount of Bear Stearn's bailout was not disclosed. Assuming total collapse, we estimated that the maximum amount of this bailout is $ 53.1 Billion. With this purchase, the Federal Reserve has agreed to put up to $ 30 Billion of Bear Stearn's less liquid asset at JP Morgan's disposal. That is essentially more than 60% of the risk forked out by the US government.

Meanwhile, the deal may salvage whatever is left at Bear Stearn. With short term funding dry, Bear Stearn may lose a lot more than its current share price. For big banks relatively unscathed with the subprime mess, JP Morgan is getting Bear Stearn's trading business and investment banking brands for free. Now, it has to deal with the potential collapse of Bear Stearns' loan. However, with $ 30 Billion back up by the Fed, JP Morgan is footing less of the bill.

What worries investors most is that whether there will be other shoes to fall in the financial arena. In the premarket trading, shares of rival investment banking Lehman Brothers (LEH), for example, was down 33% in pre-market trading after getting razed 15% the previous Friday. Henry Blodget of Silicon Alley Insider gave a well-thought bullet points on why Lehman might be the next to go. How about other financials with massive exposure of mortgage loan? Washington Mutual may be next after rumor that JP Morgan was interested in buying back in January 2008.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Lehman Brothers Holding Inc. (LEH) or any other securities.

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