InvestorPlace Blogs is powered by Marketocracy. Marketocracy has authorized Investor Place Blogs as an official registrar for voting through Marketocracy's Investment Research Rating service. Registered members of InvestorPlace Blogs are linked with a Marketocracy account to establish voting power based on their performance of trading and posting on stocks.
Looking at the recent demise of Bear Stears, it looks like several billion dollars of value was extinguished overnight. The share price plummeted from 80 (the approximate book value per share) to 2 in a matter of weeks. But what really happened was a rapid transfer of wealth, from the shareholders of BSC to other market participants, JP Morgan for one. The other beneficiaries are harder to define - the stock was not heavily shorted, at least at the last available report.
Rumors became self-fulfilling and Bear Stearns was gone. With all markets linked by electronic quotes, and everybody connected by cell phone, email, etc., it doesn't take long for word to spread. Lehman was luckier, they fought rumors of their own demise in hand to hand combat yesterday and they survived. The fact that the Fed was standing ready to hand out loans on all sorts of collateral was instrumental in stopping the run on the bank.
I think a lot of the wealth was transferred to those who planted the rumors. Bear Stearns was leveraged, as all financial companies are, but they had a reserve of cash that would have been more than adequate under normal conditions. It's like a card castle, you have to pull a card out. Presumably some group figured out where to push or pull to bring down the structure. That's right, I have a conspiracy theory. When things are so sudden, when the crisis just has to be resolved over the weekend, when the survival of the world as we know it is at stake - watch your wallet.
The implications for the ordinary investor like you and me are simple. It is very important to diversify because other targets will be found and you don't want to be holding too much of any one target. Companies that have a vulnerable capital structure should be avoided. Companies that may need capital infusions are to be avoided: that prey is reserved for others.
Too bad Elliot Spitzer isn't around to do an investigation. Maybe Wall Street wanted to stage a fitting celebration of his downfall.
| 
RSS 2.0
Comments (2)
Tom;
I gave you a three star, although I am in disagreement with your analysis. I don't believe in a lot of conspiracies (a few I will be on the fence), but I don't buy a conspiracy to the degree that you put forth. We both sit in a position of not knowing all the information, so we can only judge it according to our own interpretations and analysis based on the available public information. I think short sellers are given a bad reputation; they don't earn it. There is always shenanigans that goes on in any market, I admit . . . there will always be bad guys. I just don't think it happened here with all the scrutiny that goes on with monumental events like this. I actually wish you were right, but I have been a bear for a while and I think the FED realizes the situation is dire. JP looked at the books . . . they know how dire it is.
---Jonathan
Posted by Jonathan Coyle | March 18, 2008 4:16 PM
Tom,
I hate to admit it but I might agree with Jon here although froma different angle. It's a good piece and a good conclusion, stay away from companies with a "vunerable capital sturcture".
With that said, here's the $64,000 question. What is the book value of any of these financial companies? You wrote a good piece about phantom book value where you discussed the possible write-ups of financials and homebuilders (which in due course, may very well be true) but there is the other side of the coin. What about phantom book values that are way too high? How do you determine book value for companies with large amounts of leverage at all with credit siezed the way it is and the lack of willing banks to lend right now? Isn't it possible, that at the time people thought Bear Stearns book value was $80, that it might have been closer to $10 or $20? Like I stated in my comment on your "phantom" post, it seems book value is a moving target and right now it is moving against all the companies that reply heavily on credit.
Uncle John
Posted by Uncle John | March 21, 2008 3:02 PM