Rational Advisor

Apparently Bear Stearns got spitzered! This once great company that ruled the roost, got taken down a peg or two.

And yep, we don’t have any Bear Stearns stock, nor did we hold any Nortel, nor did we hold any Bre-X, neither did we hold any Livent or Loewen Group, and as a matter of fact we didn’t hold Enron either.

But still, because of companies such as these good investment managers who do their homework and hold sound companies will be affected by the volatility.

My own personal view is that the Bear Stearns deal for $2 had to happen. There was just no other way to clear up the mess. Much like Nortel going to $2 and below, put the final nail in the coffin to the tech bubble. This Bear Stearns deal with JP Morgan (which was one of the few financial firms that was NOT involved in sub-prime) had to happen to put the nail in the sub-prime bubble.

Let’s look at a small point in the pricing, and how good a bargian it was for JPM - Bear Stearns real estate

Bear Stearns headquarters are at 383 Madison avenue. The soaring skyscraping on prime midtown real estate in New York Bear Stearns occupies about 1.1 million square feet on 45 floors. It was selected in 2001 as one of the best new skyscrapers by an industry group. It cost upward of $280 million to build and, despite recent pressure in global real-estate markets, is presumably still worth more than the $236 million price tag JP Morgan agreed to pay for Bear Stearns.

In its 10K filings for 2007, Bear said it had entered into a “synthetic lease” arrangement for 383 Madison Avenue, under which it is obliged to make lease payments based on the lessors underlying interest costs. Companies put synthetic leases in place for accounting and tax reasons. They are meant to allow a company to achieve the tax benefits of ownership without the accounting burdens of ownership. Companies are allowed to treat payments made under synthetic leases as operating costs, which reduce corporate taxes they pay. The terms of the lease typically allow them to also achieve the tax savings of ownership through reduced payments

But because Bear Stearns retains an option to repurchase at the end of the term of the lease, for practical purposes it retains many of the benefits of ownership. It stands to eventually capture the appreciation in the value of the building. So although the building is considered “off balance sheet” for accounting purposes, Bear likely retains much of what is considered “owernship” of the building. In 2007, Bear Stearns said the maximum residual value of the option to purchase was approximately $570 million.

Effectively, this means that Bear Stearns was sold JP Morgan Chase for less than the value of its real estate assets. GREAT DEAL huh!

Who was behind this deal - the US Fed, who really lent JP Morgan the money $30 Billion, so this is the Fed again coming to the rescue. Note Bear Stearns did NOT go bankrupt, but neither did Nortel - it just felt like it.

One person familiar with the sale process said federal officials delivered a decisive prod to the firm’s directors. “The government said you have to do a deal today,” this person said. “We may not be there tomorrow to back you up.”

Bear Stearns’s sudden meltdown forced the federal government to come to grips with the potential collapse of a major Wall Street institution for the first time in a decade. In 1998, about a dozen firms, with encouragement from the Federal Reserve Bank of New York, provided a $3.6 billion bailout of Long-Term Capital Management that kept the big hedge fund alive long enough to liquidate its positions. Bear Stearns famously refused to participate in that rescue. But look at the markets now from that point. If you had purchased at the peak of LTCM crisis, you would still be much higher, even with all of today’s “troubles”, a similar thing will be said ten years from now.

“We’re very comfortable with what we found [in due diligence] and what we acquired, but we needed a pretty substantial cushion” from the Fed, Bill Winters, co-head of J.P. Morgan’s investment bank, said in a conference call last night.

I agree, JPM has got a fantastic deal, a good company at a fire sale price. With the deal, J.P. Morgan is essentially getting Bear’s coveted prime brokerage business for free. It is twice the size of Bank of America’s prime brokerage, which is on the auction block for about $1 billion.

In addition to the prime brokerage business, J.P. Morgan is also likely to integrate Bear’s clearing business, and some of its fixed-income and equity-trading operations. Furthermore, Bear Stearns also has an energy-trading business, which could fit into J.P. Morgan’s fledgling energy operations. Bear is also well-known for its risk-arbitrage business in which traders bet on the outcome of merger deals. Bear’s investment-banking unit is of less interest to J.P. Morgan, however.

Now, if only Cisco had taken over Nortel (wouldn’t that have been a smart move).

The deal is expected to close by the end of June, an unusually quick time frame. Federal regulators already have signed off on the deal, which will require a vote of Bear Stearns shareholders.

Meanwhile, worries will persist that other securities firms and commercial banks might be on shaky ground. Investors’ concerns that the flight of worried Bear Stearns customers last week might spread to other firms is likely to make for a tense week on Wall Street, despite the J.P. Morgan deal. Senior Fed officials told reporters that no major U.S. securities firm is in a similar situation to Bear Stearns. Yesterday, Mr. Paulson said in a TV interview that the government “would do what it takes” to protect the integrity of the financial system.

The backbone of every economy is it’s financial system, and every government will do whatever it can to keep it stable - and they will. Eventually, all financial companies will become more stable, because they have been taught a lesson on what can happen “Just look at what happens to Bear Stearns, if you don’t eat your broccoli, you’ll turn out like them”

What else did the Fed do this weekend. The Board voted to authorize the Federal Reserve Bank of NY to create a temporary 6 month lending facility for the 20 prime broker dealers. This enables them to pledge a wide range of investment grade collateral for loans at the new 25 basis point penalty rate. This takes effect today, March 17, 2008. They are injecting liquidity selectively.

The actions are important for several reasons. The new facility trumps the recently announced Term Securities Lending Facility (TSLF) that was to go into effect later this month on March 27th. Yesterday’s action provides direct loans to both banks and non-bank primary dealers. It is intended to facilitate their ability to liquefy what might otherwise be relatively illiquid assets. But it also means that the Fed is willing to take on credit risk to broker dealers.

Believe me, this is GOOD news, finally facts are being faced. And yes, you will see more volatility, as everyone panics who will be next… I don’t think there is a “next” as big as Bear Stearns.

Gold in the short term will move up, as the US drops its interest rates again, and teh US dollar falls. What is more important to them - the fate of the financial system or some currency, which when it falls brings in more revenues and jobs. People will jump more into Gold, until a law is passed or Hillary utters those famous words “It’s about the economy, stupid”, just like Bill did before he won the presidency. This is all a replay of the 199

Once the trade/deficit numbers are in, and people realize how much exports the US has done over it’s imports, the US dollar should then begin to stabilize and gold come back to reality. It’s all a matter of time because the economics and physics are already in place.

Now, to things that really matter… another Canadian soldier died in Afghanistan yesterday, protecting a country and getting involved in a War that has nothing to do with us. This soldier had only been there for a short time… petition your MPs call the country to a vote over this agenda, bring our soldiers back from this silliness. All that Afghanistan has is Poppy seeds. If you want to help their people out of their misery let them emigrate to other safer countries, get education, get jobs and pay taxes. If there’s no people left in the country who will the Taliban’s tyrannize.

And while I am on this rant, If Canada wants to be brave - have our athletes boycott the China Olympics, because of the millions killed since 1950 in Tibet. Send our soldiers to Tibet to help defend those peace loving people, not in Afghani-satan, where they hate the site of us. If Canada and other countries boycott the Olympics it would make China realize that their show and tell is fading. It would be a major embarassment. Canada and the developed nations made a mistake in allowing China into the World Trade Association (another thing you can blame on Bush), we legitimized their adminsitration, and said it was okay to take Tibet. We could have held out and said - treat Tibet fairly and you’ll be allowed in. So, I for one am going to boycott the Olympics. I promise not to watch even one game on TV, I will not give the advertisers the satisfaction of spewing their wares at me. And no advertisers, means no coverage… Are you brave enough?

If your politician does not support you in this, then have them do the new Olympic sport of cordless bunjee jumping!

Rational

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