March 16, 2008 – 7:05 pm


JP Morgan is going to devour Bear Stearns for $2.00 per share (another article). That’s a meal folks not a rescue. After the steroid and credit crack-rush wore off the end came suddenly in the last year of the 85 year old bank’s history. But this is only the beginning of the big bank failures, we surmise.

At the time of implosion, we had $2.7B for Bear’s total writedowns in this crisis.


Make no mistake Bear Sterns has IMPLODED. The discussions now involve only when to remove the life support and where to transfer the body.

Sources in the US say talks with potential suitors have already begun, with Royal Bank of Scotland and JC Flowers, the private equity firm, named among the interested parties. A spokesman for RBS vigorously denied any involvement.

The funeral could be as early as Monday.

S&P lowered its long-term counterparty credit rating on Bear to “BBB” from “A,” and it placed long-and short term ratings on credit watch with negative implications. Because of that S&P downgrade, bankers have now come to the conclusion that a deal must be done by Monday morning because no one on the street will trade or lend to Bear Stearns, which is rated a notch above junk bond levels.

Unlike the subprime crisis there are no initial claims of containment as the fear abroad is palpable.

To those who argue that Bear’s problems are self-contained, think again. The counterparty risks and labyrinthine links to hedge fund trades are tentacles that reach far beyond the confines of the US mortgage market.

Bear Sterns goes the merry way of Northern Rock, but as the global economy enters the end of days of ponzi finance the rest of us ask who’s next and how much.


For Bear Stearns the accuracy of our write-down/distress tally may be moot and the count may come to an abrupt end as the bleeding behemoth, dazed and distressed is breathing it’s last breaths.

Alan Schwartz, Bear Stearns’ chief executive admitted it was forced to seek funding following a sudden spike in demand from investors wanting to withdraw their cash.

Mr Schwartz said today: “The company can make no assurance that any strategic alternatives” to fund itself in the long term “will be successfully completed”.

WOW that beats the Hell outta the Too Big To Fail (TBTF) theory and is ominous for the remaining money center banks –all banks. There has been blood on the street for days, but just 24 hours ago Bear Stearns said it:

“denied market rumors regarding the firm’s liquidity. The company stated that there is absolutely no truth to the rumors of liquidity problems that circulated today in the market.”

adding today that

… it had only experienced funding difficulties in the last 24 hours.

But they weren’t buying it in the options pit, down there they buying Bear Sterns puts, hand over fists full of them.

This past Tuesday, when Bear Stearns was trading around $65 a share, there was huge put volume in the March $30 strike.

And so it was that the shares sold for exactly $30.00 at the market close Friday. It was an overnight drop of $27.00; volume was huge.

The options activity undoubtedly represents not only some insiders protecting themselves, but an active feeding frenzy on their part as well as the active option traders. It seems on behalf of the implied volatility of more than 100% that money in the know, knows the gig is up.

And today came news that several banks, including Goldman Sachs, would no longer act as a counterparty to any transactions with Bear. The inability to execute trades would essentially put Bear Stearns out of business.

It was the collapse of two Bear Stearns hedge funds last summer that brought credit markets to a roil and an economy to the brink. The ensuing frenzied concocting of bail out remedies, whether of housing, hedge funds, SIVs, asset backed commercial paper, and any sundry of credit crap has failed as this will fail and so too Bear Sterns.


Well someone in the options pit sure knew something or works for someone who does. With options expiring tomorrow and put activity as far down as the 40 strike price just look at what happened today. Even with the market recovering from the early sell off Bear is showing severe relative weakness. The FED may pull another expirations day hail Mary play, but on the street they are talking about Bear Sterns and Bankruptcy in the same hushed breath.

Whispers that the New York-based bank is in trouble dragged the company’s stock to its cheapest price since just after the September 11th terrorist attacks.

Any bets on who fails first — Bear or Citi?


Is Bear Sterns going to be the first American money center bank to bust? Judging by the action in the options market someone is betting big that way. From WSJ

Options activity is heavily tilted toward bearish bets, with aggressive players buying put options on March options contracts at the $50 and $40 strike prices – which would be an enormous move in the shares, currently trading at about $62.50 a share.Officials at Bear Stearns were unavailable for comment.

There may not be a Bear Sterns in a week as the spreads on the it’s one year credit default swaps have gapped open 250 basis points wider from 550 to 800 along with ever spreading five-year CDS spreads which are up at least 100 basis points from 450 basis points last Friday.

That spells blood in the water for Bear Sterns and if you think this is contained consider this from Mish land.

Bear were told by regulators to sell its ‘hard to price’ assets? I find it highly doubtful it would be able to sell them and hence, this leads me to question their solvency. What about the other $600 billion of assets on Bear’s balance sheet? Could it sell them? Doubtful. The reason is that everyone else owns the same type of securities and the company is being instructed to sell, yet cannot.

So the ‘daisy chain ‘has started whereby when one firm is forced to sell, it must ‘mark to market’ which means everyone else who owns the same security has to mark theirs down as well.

Does the concept of too big to fail (TBTF) hold if all banks fail? We soon will see.


Investment banks now face around $197 billion in exposure to leveraged loans used to back big buyouts in 2007, adding inestimable stress to their efforts to extricate themselves from the credit crunch. Was it worth it?

Not for Bear Sterns. The bank has an estimated Leveraged Lending exposure of $2.5 billion. In addition some fuzzy math has crept up in Bear Sterns 2007 profits

Bear Stearns booked (BSC, Fortune 500) a $225 million gain from its “structured note portfolio” in its third quarter. Without it, the firm would have been in the red.

Add it to the $2.7B the 2.5B + 225M. The only question is how the bank will account it eventually, write-downs, charge offs, ect.


Bear Stearns notoriously suffered the implosion of two subprime-related hedge funds in August 2007, documented at the Hedge Fund Implode-o-Meter:

Two Bear Stearns hedge funds that together managed some $20 billion, High Grade Structured Credit Strategies Enhanced Leverage Fund (or “SELF”) and High Grade Structured Credit Strategies Fund (or “SF”), found themselves on the losing side of their subprime bets (Made in the form of investments in CDOs).

Bear Stearns made an attempt to console SELF’s creditors by suggesting a plan whereby they contributed some $1.5 billion in capital to the funds. However, major drama unfolded on Wall Street as Merrill Lynch rejected Bear Stearns plan choosing instead to seize control of its collateral (Nominally around $800 million).

When the market was only offering 30% or less for these assets, that plan was scuttled quickly. Bear Stearns took at least the SF fund back in-house, and we’re unclear on what if any write-downs related to this (or the other fund) have migrated to the balance sheet.

The credit markets have not recovered.

As for Bear, we do know the company wrote off $1.9B in the fourth quarter on bum subprime assets in general (earlier guidance was $1.2B); however these may not have been assets from the two hedge funds in question.

As far as remaining exposure, Deutsche Bank estimates prior to Q4-07 had $884M in subprime CDO exposure, $9.6B in MBS, and $2.4B in direct subprime loans for the Bear, for a total of $12.8B (ex. SIVs and conduits).

Reportedly Bear also has $2.5B in derivatives exposure to counterparties rated at AA or below. That amounts to 19% of the company’s tangible equity (Dec. 2007 data).

We have no data yet on the bank’s exposure to Alt-A, second lien, Pay Option, or other sorts of questionable mortgage securities. Regarding write-downs, it appears almost certain that more lie ahead than behind, at this point.

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