In the annals of Wall Street, it will simply be known as the $2 deal. That's the price tag on J.P. Morgan Chase & Co.'s (NYSE: JPM) purchase for Bear Stearns Cos. (NYSE: BSC), which has a stated book value of $84 per share.
Interestingly enough, $2 seems like a stellar deal for Bear. Keep in mind that – according to a piece in the Wall Street Journal [a paid publication] – the firm was negotiating a buyout deal while it was also preparing a bankruptcy filing. Yep, in a bankruptcy, the equity holders usually wind up with zero, especially in the case with an entity that has high leverage ratios. Oh, and the Fed and Treasury Secretary wanted a deal to get done so as to save the financial system.
No doubt, the blame-game is in full force. But, I have a partial theory to explain the meltdown. That is, a key driver in the growth of Bear has been the Information Revolution. That is, it has allowed for the structuring of extremely complex investment structures (it's breathtaking some of the things that can be done to a simple mortgage note).
However, such things have provided a false sense of security. The software algorithms don't seem to account for basic things – such as the loss of confidence.
Simply put, counterparties and clients can use their own computers to pull their capital out of financial institutions.
Basically, in another era, a "run on the bank" actually required people to show up to the bank and wait in line. Now, it just takes a couple keystrokes.
The frightening thing is that – in our convoluted global financial system – we might only be confident that the real value of things may be virtually nothing.
Tom Taulli is the author of various books, including The Complete M&A Handbook
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