The newspapers today are all a buzz about Bear Stern’s liquidity crunch and the concerted efforts that the JPMorgan and the Fed are taking to provide some immediate relief. The New York Times reports that [bold and italics added for emphasis]:
“For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price. ”
Isn’t it ironic that Bear Sterns, which had refused to go along with other Wall Street firms to save Long Term Capital Management (LTCM) in 1998, is now faced with the same problem? However, Jamie Dimon, the CEO of JPMorgan is a shrewd banker who will not let that bit of history get in the way of getting Bear Sterns at a very discounted price.
JPMorgan’s Bear Hug
While JPMorgan has repeatedly publicly stated that it is not in the market for an investment bank, Bear Sterns makes a very good case from a risk / reward basis. Given the near collapse of the Bear Stern’s stock price, the market cap of Bear Sterns is approximately $4.4 billion, as of midday Friday, March 14, 2008. Given JPMorgan’s strong capital position – $88.7 billion in reserve (resulting in an approximately 8.1% Tier 1 capital ratio and approximately 12.6% capital ration, overall) and $71.9 billion in tangible common equity, at the end of 2007.
Given the strength of their financial statements, JPMorgan can easily absorb Bear Sterns without substantially denting their capital.
Additionally, Bear Sterns is not a true investment bank as it historically dealt heavily in mortgage back securities and did not diversify out of this niche. Additionally, Bear has valuable business units, such as its real estate, hedge fund servicing, and strong back office units.
Why It Makes Sense
Since Bear Sterns was really a mortgage back securities trading firm rather than a full service investment bank, Bear’s mortgage-back securities and mortgage trading business will help to boost JPMorgan’s standing in the global debt capital league market.
According to Thomson Financial global mortgage-backed securities league table (B10), for FY 2007, JPMorgan at $77.9 billion was ranked 6th and Bear at $86.5 billion was ranked 3rd. If combined, JPMorgan would move to the top at $164.4 billion, displacing Lehman Brother at $115.8 billion.
Additionally, Bear Sterns has one of the best back office units in the business. The market for debt securities will improve. By using this period of uncertainty and slow business, JPMorgan has the time to combine the two back offices together and be prepared to take larger share of the settlement business when the market returns.
Finally, I think the Bear’s office, which is located directly across the street from JPMorgan’s headquarters at 270 Park Avenue, provides easy logistical integration. I hope Jamie takes this opportunity to takeover Bear Sterns.
Go Jamie!
Regards,
Ed Kim
http://riskyops.blogspot.com/
DISCLOSURE: The author holds long positions in JPM at this time.
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