March 18, 2008 by lonbud

Here Today, Gone Tomorrow

Bear Stearns, the fifth largest investment bank in the United States, had $17 billion in cash and salable assets on March 11. At the close of trading on Friday, March 14, the eighty-five year-old firm had an exchange-listed market capitalization of just $4 billion. Over the ensuing weekend, one of its competitors, JP Morgan Chase & Co., agreed to buy Bear Stearns in a paper transaction backed by financing from the New York Federal Reserve Bank, for just under $240 million.

In under a week, one of the venerable names of American capitalism turned to vapor. Shareholders, fully one third of whom are Bear Stearns executives and employees, whose stock traded less than a month ago at over $80, saw their interest in the company repriced at a mere $2 per share. And the offer was not for cash, but rather for the happy prospect of shares in the savior, JP Morgan!

Of course, news accounts and yammering commentators talking about this story yesterday described it as a ‘bailout,’ with critics of the system saying the bank should have been allowed to ‘fail,’ while government officials like SEC Chairman Christopher Cox rushed to reassure nervous investors, saying, “We have a good deal of comfort about the capital cushions at these firms at the moment.”

President Bush himself mounted the plunge-protection hustings, gathering Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, along with Mr. Cox and others in the President’s Working Group on Financial Markets at the White House on Monday for a Sunny Jim cheerleading session designed to shore up public confidence in the orderliness of financial markets. “The United States is on top of the situation, ” he said.

As this is being written, New York markets are trading today with index gains of more than 2%. Another investment bank rumored to have capital cushions not unlike those recently enjoyed by Bear Stearns — Lehman Brothers — is up more than 30%. A third, said to be in even greater peril than Lehman — Merrill Lynch — is up nearly 10%.

Mr. Bernanke will meet later today with the Fed’s Open Market Committee, with the entire universe expecting him to announce further significant reductions in the short-term federal funds rate, designed to bolster an economy that many credible observers believe has already entered a recession.

It’s never advisable to consult a crystal ball when talking about future economic prospects, though, ironically, public confidence in the economy and investor decisions about whether to buy or sell shares in a particular concern are often based, not on things as they are, but on things as corporate executives predict they will be.

For example, one of today’s trading session leaders is Yahoo, the Internet company that was recently the subject of a merger offer from Microsoft valued at $31 per share. Today the company reiterated sunny prospects for the future, saying it expects to roughly double operating cash flow over the next three years from $1.9 billion to $3.7 billion and generate $8.8 billion in revenue excluding traffic acquisition costs in 2010.

While Yahoo is posting a one-day gain of more than 5%, its stock is still trading below Microsoft’s offer price. Founder and CEO Jerry Yang said the company has “a combination of unique assets” whose value “is not fully appreciated.”

Well, maybe so.

Less than a week before his company’s bottom fell out from under him, Bear Stearns’ Alan “Ace” Greenberg responded to concerns about the firm’s liquidity saying, “It’s ridiculous, totally ridiculous.”

Turns out he was right, though not in the way many people thought at the time.