Shares of Bear Stearns closed at $30 on Friday. The buyout price represents an astonishing 97.5% discount to the $80 per share book value that the firm has reported. The purchase price is worth only a quarter of the value of the firm’s Midtown Manhattan skyscraper, which is probably worth at least $1 billion, per the New York Times. At Friday’s close, Bear Stearns’s stock-market value was still in excess $3.5 billion. That has all changed now.
The deal was overseen by the Federal Reserve and the U.S. Treasury Department and was rushed in an effort to cushion the impact of the bank’s imminent collapse on global financial markets. According to the Wall Street Journal, this was less a “bailout” than a Fed-mediated liquidation sale. Bear shareholders will essentially be wiped out in this closing-out sale.
Shares of financial firms plummeted on Monday as central bankers scrambled to stave off a devastating crisis of confidence in the investment community. Other investment banks fear that the crisis of confidence gripping Wall Street might spread across borders. If fact, Asian markets quickly reacted: Hong Kong plunged 5.2%; Tokyo, 3.7%; and Mumbai, 6.5%.
The experience of Bear Stearns shows that no matter how big you are, or how esteemed your name or distinguished your history, once the investing public loses confidence in the institution, the end can come quickly. The New York Times reuefully noted that it is a lack of confidence, not capital, that ultimately topples even the savviest financial institutions. The lesson to be learned is no entity is “too big to fail”, which is what most people thought of Bear Stearns as the crisis was unfolding. They were wrong. For British billionaire Joseph Lewis alone, this meant losses of around $800 million.
The one organization that came out ahead is obviously the House of Morgan, the world’s second largest financial institution ( a hairbreadth away from Citigroup), which managed to wrangle a federal guarantee which considerably limits the bank’s risk. It was also sweet vindication for JPMorgan Chase CEO James Dimon, arguably now the most powerful banker in the world according to the NYT, who was forced out of Citigroup by his former mentor, Citigroup chairman Simon “Sandy” I. Weill. Sandy Weill’s first job was as a runner for Bear Stearns.
JPMorgan Chase, in an effort to pacify agry Bear shareholders, has made a new offer price of $10 per share.