| Risk Management, Investment Banks, Financial Shenanigans, Financial Engineering, Earnings, Banking | 9 Jan 2008 11:00 PM |
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| Bear Fight - A most bearish view on Bear Stearns in a bear market by Reggie Middleton |
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This is an introduction and precursor to the work being done over at Reggie's laboratory concerning Bear Stearns, who has seen its share price halved since the credit market melee kicked off. A melee that many say the Bear is responsible for igniting. I don't know how fair a comment that is, but I do know one thing, though. In terms of equity devaluation for the bear, you probably ain't seen nothin' yet. Bear Stearns will soon be, if not already, in a fight for its life. It is beset with the possibility of a criminal indictment (no Wall Street firm has ever survived a criminal indictment), additional civil litigation, and client defection and aliention. Despite all of these, the biggest issues don't seem all that prevalent in the media though. Bear Stearns is in a real financial bind due to the assets that it specialized in, and it is not in it by itself, either. It's excessive reliance on highly "modeled" and real asset/mortgage backed products in its portfolio may potentially be its undoing. See Banks, Brokers and Bullsh1+ part one for a run down on model risk and part two for my take on counterparty credit risk as a backgrounder before reading this piece.
I thought of sharing with you some of the key observations that we've made while doing the valuation model for Bear Stearns, which admittedely is quite late. I first took interest in Bear Stearns in June, but only recently got around to addressing the investment banking sector in a matter suitable for the blog over the last month. During that month, BSC has seen aggressive adverse price action. My research tells me that this price action is not only justified, but will have to continue in order for BSC to be adequately priced. There will be details that support this assessment in the final report.
Bear Stearns first caught my interest at around $130. When we started with the original shortlist of the investment banks for formal analysis on December 13, 2007, Bear Stearns stock price stood at $98.39. The stock price has fallen by more than 27% since then and now trades at $71.17.
External fundamentals behind my call for additional adverse price reaction
The company's exposure to the asset and mortgage backed securities is as follows:
Mortgage and Asset backed inventories of $43.6 billion
| Amount in US$ billion |
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| CMBS | 15 |
| RMBS and others | 28.6 |
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| Total | 43.6 |
See the following charts for the macro fundamentals beneath the adverse future price movement in both RMBS and CMBS.
Residential Price Movement Expectations
Commercial Price Movement Expectations
Bear Stearns' Mortgage and Asset backed Securities of $46 billion
| Amount in US$ million |
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| Subprime Mortgage loans | 500 |
| Investment grade subprime securities | 1,100 |
| Below investment grade securities | 200 |
| ABS CDO | 750 |
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| Total | 2,550 |
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written by Tom S, January 11, 2008
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written by Reggie Middleton, January 11, 2008
Look at it simplistically. The world's largest MBS house has less than $1 billion of MBS and ABS in thier inventory? That, and I have this bridge in Brooklyn for sale...
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written by Johnny Lay, January 12, 2008
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written by Reggie Middleton, January 12, 2008
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written by Tal Fletcher, January 13, 2008
It seems that you most recent analysis suggests that there is no real valuation level which makes sense to hold on to shares and to liquidate any and all now despite the fact that there are some outside individual and country and institutional investors which may choose to make a merger happen
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written by Reggie Middleton, January 13, 2008
Of course I can think of a few reasons. The primary one is that the holder of the stock simply doesn't agree with me. That is what makes a trade, two sides with opposing opinions exchange capital. One may take a loss while one may profit. I am being relatively elusive because I do not want to make it appear as if I am giving advice on this blog. I definitely am not, and if it does appear that way I could end up in hot water. All I do is share my opinions about my experiences and observations in the global macro environ.
As for there being no real valuation level at which to hold, I don't believe I insinuated that. What I did insinuate, or at least tried to, was that if real assets revert to mean valuations as I interpret them Bear Stearns will not be a prudent investment. As for institutions interested in portions of the franchise, I am sure that will happen. There may even be some who are interested in the franchise as a whole. We simply may not agree on its prudence, but that does depend on price and the ultimate movement of the underlying assets. 12 months to date, the playing field has been littered with institutions who have failed to respect the severity and the duration of this current risky asset downturn. There is no evidence that this has ended. As a matter of fact, as I hear pundits attempt to call bottoms a mere 12 to 18 months after it has begun (although it easily lasted 3 to 5 years), it simply strengthens my convictions that it will claim even more casualties.
It is obvious Joseph Lewis and Citic didn't agree with me, and believe it or not, there is a long list of many others. To date, though, it appears as if my opinion is the most valid one. Only time will tell if I am ultimately wrong or right, and by how much.
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written by Reggie Middleton, January 14, 2008
Everyone should get a minimum of 8 hours of sleep, or they will end up a grouch like me
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written by Tal Fletcher, January 14, 2008
I have the highest regard for your work - especially on these big 5 5 financial firms and banks.
As you may know, the liquidations by employees during the last 10 days of last month of 2007 occured during the same window of opportunity provided to all executive and a;; other employees and other insiders following the release of earnings which just happened to coincide with the annual distribution of retirement and deferred comp stock and employee benefit option positions and perhaps end of taxed influenced gain/loss influenced transactions.
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