FYI | Mar 17 2008
By Greg Peel
The Wall Street Journal reports JP Morgan is working quickly to finalise a deal for the acquisition of Bear Stearns before the markets open in Asia this morning. The intention is to try to head off any further global stock market collapses. However, It will not be a deal that can necessarily be agreed upon quite so quickly.
The WSJ believes the bid price for Bear would amount to US$20 per share, compared to the closing price of US$30 per share on Friday, which was already down US$27 from Thursday, and down from a peak of US$170 last May. This values Bear at US$2.2bn. Its New York headquarters alone is supposedly worth US$1.2bn, so that leaves a mere US$1bn for an 85-year old brokerage firm which was last week the fifth largest on Wall Street. In the middle of this decade, Bear was making US$1-2 billion a year.
The difficulty of such a deal is that in this day and age, more so than any other before, all Wall Street firms are intricately interwoven with a spider’s web of complex borrowing and lending transactions and derivative trades. But this is also the reason expediency is paramount, given Bear cannot be allowed to fall at arm’s length. Its demise would drag down everyone else on the Street. JPM, if it is the ultimate buyer, still has to decide what to do about all the distressed asset backed securities Bear is loaded with. To attempt a fire sale would be to force further write-downs amongst all firms, thus further margin calls from lenders and further capital erosion.
Bear is planning to release its fourth quarter earnings report tonight, for what it’s worth. This week and next sees all the US investment banks providing such reports. Further write-downs and heavy losses are expected. Goldman Sachs and Lehman Bros will report on Tuesday, and Morgan Stanley and Merrill Lynch will report on Wednesday.
The Fed is due to make its rate decision on Tuesday. Expectations of the extent of the cut had moved from 50 points to 75, but now even 100 points is being contemplated following the Bear Stearns collapse. The way was made clear for the Fed to act aggressively when the US became the only country on the planet not to be suffering from inflation, as was revealed in the February CPI result of 0% change in both the headline and core.
Ahead of the decision, President Bush has convened a meeting tonight of what is known as the “Plunge Protection Team”, which includes Paulson, Bernanke, and the heads of the SEC and CFTC.
Tonight in the US also sees the release of the fourth quarter current account, January long-term TIC flows (in and out of USD assets), industrial production for February, the Empire State (NY) manufacturing index for March, and the NAHB housing index for March.
On Tuesday the February PPI is released, along with February housing starts and building permits. Mid-session, the Fed decision is revealed. Thursday brings the March leading indicators and Philadelphia Fed index. Then it’s Good Friday, thank God.
Australia has a relatively benign week ahead by comparison. Tuesday sees the release of the RBA minutes of the meeting that put the rate at 7.25%. Wednesday brings fourth quarter dwelling starts, the leading economic index for January, a preliminary February balance of payments number and skilled vacancies for March. Thursday brings February vehicle sales and the monthly RBA bulletin.
Elsewhere in the world, the UK February CPI will be of interest on Tuesday.
History will unfold this week. Oh – and Happy St Patrick’s Day.
