As if JPMorgan Chase (JPM) CEO Jamie Dimon needed to prove himself anymore. The banking giant has already navigated these treacherous waters better than their competitors and now they find themselves in a unique position to be the best situated to take over Bear Stearns (BSC). With a well capitalized bank being the only logical choice for a takeover, JPM was really the only one with a balance sheet strong enough to get a deal done. Without any real alternative bidders, Dimon was able to avoid bidding against himself and named its price: $2 per share, or about half the value of Bear’s NYC headquarters.
The Bear Stearns debacle, ending as an orderly liquidation, highlights how important management can be in determining a company’s fate. While that seems obvious, it is not always easy to figure out ahead of time that Jamie Dimon is a great CEO and Jimmy Cayne was not. Many investors like to visit management and ask lots of questions of company executives, but that strategy alone fails to really give you an accurate read on management’s capability. After all, company executives always will speak highly of their firm’s prospects and obviously make the bullish case to investors whenever given the chance.
To shield yourself from management bias, you need to compare what a company says to what it ultimately does. JPMorgan Chase has delivered on their claim of manageable sub-prime losses. Bear Stearns said last week everything was fine and days later they needed a Fed/JPM duo to keep them out of bankruptcy. If companies you follow/invest in consistently deliver what they say they will, you should feel comfortable banking with them. If disappointments become commonplace, be sure to keep that in mind.
So where do we go from here? Well, the investment banks are still vulnerable. They rely on short term funding and their asset base is littered with illiquid, low quality assets. When clients and funders decide to halt business with a firm like Bear, it’s game over. Remember, investment banks and deposit banks are not the same. Until the Fed’s recent changes, investment banks did not have access to liquidity like the banks did. Although that will change now, the Fed is being forced to accept junk collateral. Companies like Bear made almost all their money on M&A deal fees and underwriting structured products. Those markets are dead, and there is not much else a company like Bear has to prop itself up.
Given recent events, should every financial stock simply be sold? Unfortunately, it’s not that simple. As you can see, our markets aren’t really “free” markets. Bear Stearns needed help, so the Fed guaranteed $30 billion of Bear’s assets to entice JPM to take them under their wing. Whether it is tax rebate checks, Fed backstops, or mortgage bailouts, the government will step in and help curb the problems. As a result, the downside will never be as bad as the fundamentals would tell you they could be because intervention and workouts are always a possibility.
Full Disclosure: No positions in BSC or JPM
Update I (10:00AM CT):
BSC is trading between $4 and $5 per share today. Part of that is short covering and the other part is due to people speculating that someone could bid more than $2 for BSC. Don’t count on it. JPM is a logical fit since they are the bank with the closest relationship with BSC. This is not about finding the highest bid. It’s about finding the best partner for an orderly liquidation, since without the Fed/JPM plan, BSC goes under due to lack of financing. CNBC’s David Faber also just mentioned that JPM has the option to buy the BSC building should investors vote against the $2 per share offer, so they could always just kick BSC out in such a case.
Update II (2:00pm CT):
Lots of talk today about how employees own 30% of BSC and have seen shares worth seven figures last week now worth five figures today, and how much of their net worth has been wiped out. Have we not learned anything from Enron and Worldcom? Did these employees really have the bulk of their net worth in one company’s stock? If so, was it really unhedged? I definitely agree that it sucks that most of Bear’s employees will lose their jobs, but if some of them had millions in BSC stock disappear overnight because of a lack of diversification and/or hedging, they need to take responsibility for that aspect of this meltdown.