Using Veritas to Construct the "Per…

29-04-2017 Hits:87947 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

Read more

The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:81753 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

Read more

What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:81617 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

Read more

Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:86105 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

Read more

This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:82568 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

Read more

What is the Value Proposition For Verita…

01-04-2017 Hits:84717 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

Read more

This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:55801 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

Read more

Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:84020 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

Read more

Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:83742 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

Read more

The Country's First Newly Elected Lame D…

27-03-2017 Hits:83620 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

Read more

Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:90022 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

Read more

The Transformation of Television in Amer…

21-03-2017 Hits:87619 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

Read more

Bear fightThis 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

 


CMBS

15

RMBS and others

28.6

 


 


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

Shiller housing forecast

Commercial Price Movement Expectations

Commericial Rents


Bear Stearns' Mortgage and Asset backed Securities of $46 billion

Amount in US$ million

 


Subprime Mortgage loans

500

Investment grade subprime securities

1,100

Below investment grade securities

200

ABS CDO

750

 


 


Total

2,550

{mosimage}{mospagebreak}

Internal fundamentals behind my call for additional adverse price reaction

 

The company's top employees sold stocks worth over $20 million in December 2007. In fact, before resigning a couple of days back, Bear Stearns Chief Executive James Cayne sold $15.4 million of stock in December 2007. Cayne exercised and sold 172,621 shares of stock vested under a capital accumulation plan according to a filing with the SEC. However, Cayne still owns 5.6 million shares, or about 5% of the company.

In addition, In a Form 4 filed with the SEC, Bear Stearn�s President, Alan Schwartz reported he exercised options December 21, 2007 at no cost as part of a compensation plan and sold 67,900 shares the same day for $89.01 apiece. Further, An Executive Vice President exercised options for 102,408 shares of common stock according to a SEC filing. The bank�s Treasurer exercised options for and sold 25,927 shares of common stock in the same month.

Furthermore, On 08 January 2008, Moody's Investors Service downgraded the ratings of 46 tranches issued by Bear Stearns in 2006 and placed under review for possible downgrade the ratings of 11 tranches from eight Alt-A deals issued by Bear Stearns in 2007. The ratings of 24 tranches were downgraded to junk status, while 13 others had their ratings lowered but remained above junk status. In addition, the nine tranches already considered as junk status were cut further. Moody's said it took its action based on higher-than-anticipated rates of delinquency, foreclosure and banks owning real estate relative to credit-enhancement levels. We are trying to get some more information on the exact tranches which could impact the company�s estimated earnings in Q108 and FY2008. This is directly related to the work that we did with Ambac and MBIA (see list of links at end of article), for Ambac insures some of these tranches and we find the leverage and exposure for Ambac to be a disaster waiting to happen. There is also a direct connection to the model risk (of which Bear Stearns has singificant amounts) and counterparty credit risk that was loosely described in the Banks, Brokers and Bullsh|+series (Banks, Brokers, & Bullsh1+ part 1, Banks, Brokers, & Bullsh1+ part 2).

The company in its previous quarter�s earnings call also mentioned that it has considerable investment in the troubled bond insurer ACA Capital Holdings. ACA Capital�s bond insurance unit has been taken over by the Maryland insurance administration owing to the troubles faced by the bond insurer. The company was recently downgraded to junk territory by S&P, resulting in a cash shortage for the company. ACA recorded a $1.04 billion loss in third quarter owing to recent turmoil in the credit market. A substantial exposure to collateralized credit obligations with a significant amount of asset-backed or mortgage-related debt obligations contributed to the company's third quarter loss. The relationship between the types of assets Bear Stearns holds in its inventory, the current default rates, the litigous liability exposure, the precarious situation of the mononlines (actually, the multi-lines, since the only ones that are in trouble are the ones that strayed from their knitting) and where my research says the underlying must move price wise to achieve equilibrium, just may cause Bear Stearns to enter into a spiral where no amount of PRUDENT capital may be able to rescue it. For more on my findings of how the flaws of this monoline turned mult-line business model will reverbrate throughout Wall Street and Main Street, start with A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton, then follow the bullet list down at the end of this article.

Despite these negative developments, Bear Stearns has managed to find investors. British financier Joseph Lewis owns 9.6% of Bear Stearns. He has acquired nearly 2 million more shares. In September 2007, Mr. Lewis had become the single-biggest investor in Bear Stearns, acquiring shares soon after two Bear hedge funds collapsed because of bad bets on securities backed by mortgages. He spent some $860 million to buy 7% of the company when the stock was trading at more than $100 a share. However, with the stock's fall, Mr. Lewis has a paper loss of well into, if not over the $100 to $200 million range. The latest SEC filing said Mr. Lewis has spent about $1.19 billion to buy Bear shares, spending an average $107.31 each. Also, in October 2007, Bear Stearns and Beijing investment bank CITIC Securities Co. agreed to invest about $1 billion each for minority stakes in one another. The companies agreed that CITIC's resultant ownership in Bear Stearns can be expanded to as much as 9.9%, and Bear's combination of convertible-securities holdings and five-year options in CITIC could, over time, amount to about 7% of the Chinese investment bank. These investors, obviously have an outlook on the bank that is contrary to mine, and would obviously be on the opposing side of any trades that took place.

 

Model Risk

Bear Sterns Companies Inc






In $ Billion Level 1 Level 2 Level 3 Impact of netting Balance as of August 31 '07
Financial instruments owned, at fair value




Non-Derivative trading inventory 26.8 85.7 14.6 - 127.2
Derivative trading inventory 2.2 94.3 9.0 (90.9) 14.7
Total FI owned at fair value 29.1 180.1 23.6 (90.9) 141.9
Other Assets 0.7 0.9 3.7
5.3






Total Assets at fair value 29.8 181.0 27.3 (90.9) 147.2

This has already presented itself in the dual hedge fund blow up over the summer, the recent and massive losses, and the recent announcement that they will be moving at least 7 billion dollars to the level three (BS) category. Bear Stearns has also very recently announced another hedge fund blow up, which doled out significant losses to investors and is attempting a liquidation.

{mosimage}{mospagebreak}

Counterparty Risk

 

In $ million
OTC Derivative credit exposure ($ million)


The table summarizes the counterparty credit quality of the company's exposure with respect to OTC derivatives  
Rating(2) Exposure Collateral (3) Exposure, Net of Collateral (4) Percentage of Exposure, Net of Collateral Total exposure a % of Total assets Net exposure as a % of Total assets Net exposure as a % of equity
AAA 3,369 56 3,333 42% 0.8% 0.8% 25.6%
AA 6,981 4,939 2,153 27% 1.8% 0.5% 16.6%
A 3,869 2,230 1,784 23% 1.0% 0.4% 13.7%
BBB 354 239 203 3% 0.1% 0.1% 1.6%
BB and lower 1,571 3,162 322 4% 0.4% 0.1% 2.5%
Non-rated 152 223 94 1% 0.0% 0.0% 0.7%

16,296 10,849 7,889 100% 4.1% 2.0% 60.7%








(1) Excluded are covered transactions structured to ensure that the market values of collateral will at all times equal or exceed the
related exposures. The net exposure for these transactions will, under all circumstances, be zero.    
(2) Internal counterparty credit ratings, as assigned by the Company�s Credit Department, converted to rating agency equivalents.

 

 

Mortage securitizations, BSCs primary value driver has dried up, thus so has their excess returns, and the vast majority of their normal returns as well
Securitizations, BSC's bread & butter value driver has dried up, and this dearth of cash flow will reverbrate throughout their business model, on a leveratge basis for their is still some risk from past products as the headlines have made clear
image007.png
Net Income looks to be sparse for some time due to the loss of their main value driver

 

image003.png
Net Revenues dropped significantly in Q407, unadjusted forcast sees 60-65% return. This may be adj. down once my proprietary housing forecasts are applied

 

 

image005.png

Capital Markets Revenue show a similar pattern, and is primarily what cause the drain on the company, along with asset management (unhedged hedge funds), of course
bsc_leverage.png
BSC Leverage::Like many banks on the street today, BSC uses enough leverage to get it in trouble with large moves in the undelying assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

{mospagebreak}

In the news:

  • Probe of Bear Stearns Hedge Funds Is Broadened
  • Probe of Insider Trading at Bear Stearns - According to a commenter on this article, the "authors fail to raise the issue of Bear Stearn's ongoing appeal against a court ruling regarding its handling of the Manhattan Fund scandal almost 8 years ago. Clearly, the firm's hedge fund troubles go back some way."

    I will be presenting my full analysis of Bear Stearns, complete with my realistic valuation models, on the boombustblog.com some time next week. Stay tuned.

Opinions on the Monoline industry:

  • A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton
  • Tie-in to the Halloween Story
  • Welcome to the World of Dr. FrankenFinance!
  • Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion
  • Follow up to the Ambac Analysis
  • Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility
  • More tidbits on the monolines
  • What do Brittany Spears, Snow White and MBIA have in Common?
  • Moody's Affirms Ratings of Ambac and MBIA & Loses any Credibility They May Have Had Left
  • My Analyst's Comments on MBIA/Ambac/Moody's Post
  • As was warned in this blog, the S&P downgrade of a monoline insurer reverberated losses through c
  • Download a "Window" into Ambac's Problems