It'll probably take a few days for my eyes to return to their normal size. The price tag Bear Stearns (NYSE: BSC) agreed to be taken out for, about $240 million -- less than what the Yankees paid for Alex Rodriguez -- caught nearly everyone by surprise.
Like many, I'm having a tough time grasping how the dealmakers concluded that $2 per share was adequate, especially when Bear Stearns claims that its book value currently stands around $80 per share. Nonetheless, it happened, and now all eyes focus on Bear's new parent, JPMorgan Chase (NYSE: JPM).
Between all the chatter surrounding Monday's news, an equally important issue remains largely ignored: What in the world will JPMorgan do with Bear Stearns?
Jamie Dimon: The new Warren Buffett?
There's a reason JPMorgan was selected to become Bear's adoptive parent. It's been one of the only Wall Street firms that kept its books healthy enough during the subprime shakeout to now have enough oomph to lend its struggling neighbors a hand. One thing is for sure: If JPMorgan can pull Bear back to even a fraction of its former self, the acquisition will go down in history as one of the most lucrative deals ever made.
Bernanke & Co. are kicking in $30 billion of non-recourse loans that guarantee some of Bear's riskiest assets. Those loans basically shift the bulk of the risk regarding mortgage-backed assets from JPMorgan's books into taxpayers' hands.
If those $30 billion in assets completely fail, JPMorgan won't have to pony up a penny. If the investments succeed, it's left with all the upside. While such financing reminds some of a socialistic empire, and seem a real blunder on Bernanke's part, it's pretty sweet for JPMorgan. The banker can now begin picking apart Bear Stearns' assets without fretting over what it'll do if the debt market continues to tank.
For JPMorgan shareholders, those terms could be the groundwork for one of the biggest boons they've ever seen. Sure, some of Bear Stearns' assets will ultimately become worthless, but others are undoubtedly worth a lot of money.
My, what pretty assets you have!
Earlier this month, a JPMorgan executive reminded investors, "If a special opportunity came up to acquire a prime broker at a decent return, we wouldn't hesitate. We've always said, 'Boy, if there was one for sale, we'd love to look at it.'"
Perfect timing. The most lucrative portion of Bear Stearns' business lies in -- you guessed it -- its prime brokerage division. In 2007, that unit pulled in $1.2 billion in profit, making it the third largest in the industry, just behind rivals Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS). Funny what a little wishing can do for you.
If JPMorgan can successfully integrate Bear's prime brokerage business into its own premier commercial and investment banking units, you might see JPMorgan achieve the "supermarket" financial-center status that has eluded Citigroup (NYSE: C) over the years.
On top of that, JPMorgan will inherit Bear's 45-story Madison Avenue headquarters. Not only do some place the building's value around $1.5 billion, but it could also replace JPMorgan's original plan to build and move into a $2 billion skyscraper located at Ground Zero. That alone is more than worth Bear's price tag.
So with mortgage-backed securities backed up by the Fed, a prime brokerage business that should gush profits, and key real estate essentially being handed over for free, JPMorgan also gets two other major Bear Stearns units: investment banking and wealth management. Here, the advantage is about as simple as it gets; Inherit lucrative clients, then integrate them into JPMorgan's already top-notch investment bank and private client divisions. And with Bear now out of the loop, the less competitive landscape will help the survivors -- like JPMorgan -- prosper in the future.
For once, an attractive bank stock
With huge upside potential and a downside risk being protected by the Fed, JPMorgan CEO Jamie Dimon probably made the best move of his career, and maybe the best move in the history of Wall Street. Sure, it'll take a little time, but with a "heads I win, tails, um, I still pretty much win" scenario, JPMorgan might end up as the only bank getting a boost from the recent debt mess.
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