To everyone who called me or emailed me over the weekend saying, "How could this happen? How could Bear Stearns go from $57 to $2 in two days?" I would offer the comment of one astute trader, who said, "When you are levered 30 times and have no access to finance it doesn't take a huge move on $400 billion in assets and $260 billion of debt to wipe out the equity."
Two questions dominate the Street this morning:
1) What will Bear Stearns' shareholders--specifically Bear employees--do? The $2 per share deal is subject to shareholder approval, and Bear employees--many of whom have significant parts of their life savings in Bear stock--are certainly stunned enough to create at least a minor protest over the price. Sandler O'Neill noted that "we do not believe it is incomprehensible that this deal may have bought Bear Stearns additional time to assess its situation which may lead shareholders to reject the offer."
2) What will happen to the other major brokers and banks, and what will the reaction of the credit markets be? With a book value at nearly $80 per share for Bear, the $2 price makes it tough on other brokers. A flight to firms with the strongest balance sheets seems obvious. Analysts were out this morning with various comments on who does have the strongest balance sheet: Goldman Sachs , for example, opined that Morgan Stanley and JP Morgan had the strongest balance sheet. Street seems to be treating it that way: Lehman down 28 percent pre-open, Merrill down 16 percent, Goldman and Morgan Stanley down down 8 percent, JP Morgan up.
Meredith Whitney, who has become an ax in this space through her coverage at Oppenheimer, put out a note this morning titled, "BSC Fire Sale to Cause Valuation Adjustment for All Financials: Banks at Risk," in which she argues that financial stocks have further downside of as much as 50% based upon 1990/1991 multiples of tangible book values. She says most banks are trading well above their price to book lows of the 1990-1991 cycle.
So, what will finally end all this turmoil? The Street is screaming that the government should directly or indirectly begin buying mortgage backed securities, and, to a lesser extent that a wider bailout program needs to be devised to stem home price depreciation.
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