Why Has Bear Stearn’s Stock Been Rallying?

Bear Stearns (BSC)
1 minute chart, March 17-18, 2008


Note the red horizontal line above is at the $2 mark. 
Since the announcement of the $2 dissolution of Bear Stearns, the stock has undergone a puzzling rally.  After gapping down 94% or so Monday morning, the stock of BSC traded up to $7+.

Floyd Norris posed the "Great market puzzle" of the day:  Why was Bear Stearns stock trading so much above what Morgan plans to pay?

Today’s WSJ notes that Bear’s stock has soared 23%. Their answer: "bets that J.P. Morgan will have to pay more for the firm, setting the stage for a high-stakes game of brinksmanship with investors in one corner and the Fed and J.P. Morgan in the other."

I think that’s wrong.

There is a simpler explanation, one that might surprise you: BOND HOLDERS are buying up Bears loose stock. As much as they can get. 



Consider: there is ~$75 billion in outstanding bonds (see Bloomberg screen below), and another $75 billion in other miscellaneous paper. (UPDATE: The NYT pegs it at $300B).  Prior to the BSC/JPM deal’s announcement, the BSC Bonds were trading for 80 cents on the dollar.

Imagine your fund owned a one billion dollars worth of Bear bonds (mark to market = $800 million).  Isn’t it worth buying 10  million shares or so at $3 – 4 or so dollars a share? You will get $2 per share in JPM stock, so buying it a few bucks over the takeover price isn’t all that risky. Remember, insiders own 30%, and Joe Lewis also owns about 10%.

So as mad as the accumulation appears, its actually quite rational — IF YOU ARE A MAJOR BOND HOLDER, and are doing this to capture voting stock. (All the other idiots buying BSC are pretty much fucked).


Bear Stearn Bond Issuances


Also on the case: Felix Salmon, David Neubert   

As I have been saying, this was an orderly liquidation — not a bail
out. The Fed would have been embarrassed to have Bear Stearns go belly up on
their watch — even though the official coroner’s pronouncement was a deadly cocktail of a love of mortgage backed
securities mixed with weak risk management. The thinly traded mortgage-based paper got marked lower and lower because NO ONE ELSE WANTED THEM. That is what caused the run on the bank, and not any whisper campaign.

Quite bluntly, its tough to see who else can come in at any sort of premium. The structure of the JPM deal is unique — they have the Fed’s $30B
backstop (no one else has that guarantee); They also are guaranteed
Bear’s HQ — its essentially a break up fee if the deal does not go through (making Bear worth $1.1B less to anyone else).


UPDATE: March 19, 2008 9:48am

I just noticed the NYT has a piece on this same issue: It’s Bondholders vs. Shareholders in a Race to Buy Bear Stearns Stock — They also state the total outstanding Bear bonds are $300B …



Quick Opening Reactions
Floyd Norris
NYT, March 17, 2008,  10:14 am   

Bear’s Run-Up Sets the Stage For Epic Clash
Speculators Ignite Rally, Driving Shares Up 23%;
Disbelief on Deal Price
WSJ, March 19, 2008; Page C1

It’s Bondholders vs. Shareholders in a Race to Buy Bear Stearns Stock
NYT, March 19, 2008; Page C1

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What's been said:

Discussions found on the web:
  1. Eric commented on Mar 19

    Why don’t the bondholders just buy Credit default protection on the bonds they hold. The price for such protection must have traded down now that JPM is standing behind Bear.

  2. the cds trader commented on Mar 19

    this argument makes sense, but it’s not what’s happening.

    if one person, or just a few, controlled all the bonds, then yes it could happen. but bonds are so widely dispersed that there is no way a single bondholder can make a difference (without risking more on the stock than they could reasonably make on the bonds). Plus most bondholders are different folk than the equity holders.

    i am pretty sure it’s because this Joe Lewis guy, who has ~10% of the stock, has come out against the deal, and so there is some chance the equity holders can pull off a much higher bid by effectively putting a gun to the head of JP/the Fed. If i was a major shareholder, I know where I would tell JP to go at $2 a share (and I’m sure a lot of employees of BS who own stock feel the same)…and if I’d blown $1bn on stock at $100 or so, I’d certainly spend another couple hundred million to massively increase my stake to try and force a bid multiple times above where the stock was trading on Monday.

  3. Mark E Hoffer commented on Mar 19


    you put together a top-notch weblog, I only wish that the level of commentary, that you provide, was the considered the de minimus ante, as opposed to stretching the de maxima bound.

  4. the cds trader commented on Mar 19

    ah eric, if only arbitrage was that easy, i wouldn’t need to work so hard!

    bondholders could do something even easier than buy CDS if they didn’t think JP would take them over…sell their bonds!

  5. nl commented on Mar 19

    Also, short sellers could be involved. If you’re short from $60, it doesn’t really matter if you buy back at $2 or $6. That’s a $58 profit compared to a $54 profit.

  6. kd commented on Mar 19

    CDS Trader has a point about the dispersion of bondholders but the BSC buyer list is long……add to their number the street and hedge funds who are largely winners in the near-equity default, no credit default scenario playing out. Why would cds short cover at 380 (700 last week) when JPM trades at sub 150. It is all about vote control and this may run for some time. White Knight?

  7. Mike commented on Mar 19

    This has nothing to do with BSC, but Barry mentioned page views as a buy signal a couple of days ago. Here’s another one I noticed last night:

    Kudlow at Dow 14k: “Goldilocks economy”. “Greatest Story Never Told”.

    Kudlow last night: “I just can’t be bullish on stocks here”.

    I don’t know who is a better fade, Kudlow or Pisani, but they’re both money in the bank.

  8. Steve Bowles commented on Mar 19

    Ive been wondering about the Bearstearns deal.

    Legally the company was never declared bankrupt. Without a court accepting a bankruptcy declaration most of this deal is extremely dubious.

    How can the Fed NOT give any and every other buyer the £30B guarantee – failure to do so would be a clear case of corruption – “we only bail out our friends (that bribe us) from JP Morgan” !

    Shareholders must have the final say.

    Giving the building to JP Morgan would be contestable in court.

    Interesting times await.

  9. craig commented on Mar 19

    why has BSC rallied you ask? isn’t it obvious? the trilateral commission controlled by the freemasons are acting in coordination with the bilderbergers along with skull and crossbones who are covering up the faked apollo 11 moon landings because it was the CIA that shot JFK and orchestrated 9-11 as a cover story for the aliens they are hiding in area 51. Or….you can go with the outlandish, difficult to believe story that there are some people that think the equity is worth $6. wacko’s!

  10. Marcus Aurelius commented on Mar 19

    Posted by: craig | Mar 19, 2008 9:04:02 AM


    You know what’s far worse than a conspiracy theorist?

    Someone who claims to know the unknowable, and derides others for not being as intellectually dishonest.

  11. Vermont Trader commented on Mar 19

    It’s all these things and more. I hope that everyone noticed VISA priced above its range today. What a surprise! Some money for the banks.

    Morgan Stanley CFO said they have already used the discount window at FOMC. More $ for their traders.

    Watch oil today, If it is weak I would expect money to start to flow back into stocks. Just in time for quadruple witching tomorrow.

  12. craig commented on Mar 19

    marcus….it was a joke. no derision or intellectual dishonesty going on. just a funny ha-ha. but you to be a patsy to not know the shares were being driven up by Bigfoot and Loch Ness monster spraying chemtrails from jets flying over the US.

  13. Donkei commented on Mar 19

    I think BR ripped his post from Vermont Trader’s comments yesterday. Which is okay by me–I thought it prescient, too, and helped me understand what in world is going on.

    It all seems such an insider’s game. I’ll just watch and try to learn.

  14. Bear Stearns Idiot commented on Mar 19

    I have happened to be one of those idiots.

    I am one of those idiots who has loaded up on BSC shares on Monday at $2.95-3.00, have sold a half yesterday at $7.95-$8.05 (170% gain, not bad for an idiot), and still holding a half (free money now) awaiting for a higher double digits price (that JPM will be forced to pay).

  15. Donkei commented on Mar 19

    Vermont Trader,

    Thanks for the reference. Looks like another good place to get info…

  16. BPM commented on Mar 19

    this topic was done yesterday on a blog over at WSJ

  17. BPM commented on Mar 19

    correction make that the NyT

  18. BPM commented on Mar 19

    sorry, didnt see the update

  19. Nathan commented on Mar 19

    I’m a bit skeptical of the bondholder-theory for this reason: even if you are a major bondholder, how do you determine how many shares of BSC you should buy, and at what price you should buy? There are too many unknowns. Do you just keep buying until your gut tells you it’s getting too expensive? Because of the dispersion, no one can accumulate a decisive amount, and no one knows who else is holding the shares and how they will vote. So there’s not enough information to set a rational buy price.

  20. jag commented on Mar 19

    People like Joe Lewis and Jimmy Cayne also have tremendous incentive to buy as much as they can. Lewis is looking at a $880 million loss if the deal goes through as planned. If he spends another $100 million buying up close to half of the remaining shares, he might just have enough shares to block the deal and negotiate a better offer.

  21. Bucket commented on Mar 19

    its not like BSC will go bankrupt if holders vote down the deal- either someone else will buy them, or JPM will shell out some more bucs, hence bondholders would be dumb to throw money at BSC shares….

  22. rob commented on Mar 19

    There is a reuters story out that Cayne is shopping for a white knight to take BSC at a higher price …

    What a sales pitch that must be

    “Hi, I’m the guy who presided over the greatest implosion of a finance company in the history of the world, and I think you should launch a hostile offer against JPM and the Fed …”

  23. Guenter commented on Mar 19

    Unfortunately we have closed our BEAR prime brokerage account a few months ago for reasons unrelated to liquidity concerns buy I would how much leverage BEAR now could provide on BEAR bonds, given their JPM backing.

    One other thing I wonder is if any of the large hedge fund firms which pulled their accounts from Bear (Citadel, Rennaissance Technologies,…)
    had put on large equity shorts on BEAR’s stock at the same time
    and if regulators will find out anything in this regard.

  24. BG commented on Mar 19


    In regard to Investment Banks now having defacto access to the Discount Window just like Commercial Banks….do the FED or Congress plan to regulate or restrict the activities of these Investment Banks?

    It seems they now think they are going to get the same treatment as Commercial Banks, but I don’t hear a word about any supervision or regulation.

    Are you hearing anything on this?

  25. Greg0658 commented on Mar 19

    thanks for the laugh craig

    “Reality What A Concept” Robin Williams
    one of my 1st cassettes from Columbia House, sign on the dotted line, 14 free for 6 more at regular price plus SH

  26. Greg0658 commented on Mar 19

    common laborers who work for a living are looking at this industry in a new light
    ummmmm like ahhh
    light speed awareness

    ps – and I’m aware the trade industry is work

  27. Greg0658 commented on Mar 19

    520 Trillion phony #s
    trying to corner the Frozen Orange Juice Market
    really its the 50 Trillion Real Assets

  28. Businomics Blog commented on Mar 19

    Bear Stearns Bailout: It’s Not Who You Think

    The quick read from the press is that the purchase of Bear Stearns by JPMorgan Chase was a bailout. Jim Hamilton over at EconBrowser doesn’t buy that story. He says, $2 a share is no bailout, but instead represents a

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