Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [87]
Bruce Foerster, president of South Beach Capital Markets, told Bloomberg Television that the publicly traded large investment banks and commercial banks are a “national asset.”46 A commodity trader in Chicago heard Foerster’s comments “Bear Stearns,” he said, “. . . a ‘national asset’ Gag!”
I observed that large investment banks had failed before; for example, Drexel Burnham Lambert went bankrupt in the 1980s. In the 1990s GE made a quick sale of its troubled Kidder Peabody holdings to Paine Webber. Let it happen. Jim Rogers, head of Rogers Holdings, asserts that a bear market cleans out the system, and it is good for capitalism and the markets. Bear Stearns was the fifth largest investment bank in the United States. If you believe the Fed’s excuse that the whole system is so fragile that will fall apart if Bear Stearns goes under, what happens when one of the larger investment banks goes under? The Federal Reserve is using up its balance sheet. It will have no weapons in its arsenal for the next time.47
By the weekend, Bear Stearns was looking for a rescuer. Warren Buffett turned down a request to lead the rescue. He could not evaluate Bear Stearns in one weekend, and he didn’t have enough capital.48 Alan Schwartz later told Jamie Dimon that Bear Stearns directors wanted a double-digit bid because there was a “psychological limit.”49 Warren studied under Graham, who would probably advise that emotional directors should not set a stock price any more than the emotional Mr. Market should set the price at which an investor buys or sells. A low price does not mean a company is trading at fair value, and not even Warren Buffett can come up with a value on these hard-to-price assets in that period of time.
JPMorgan Chase bought Bear Stearns with some assistance from the Federal Reserve. Now JPMorgan Chase has to decode Bear Stearns’s $400 billionish balance sheet including mortgage backed securities valued at $56 billion.50 No matter how one spins this, JPMorgan Chase bought a pig in a poke, and it is not in the interest of the health of the financial system for banks to be forced to operate that way.
Since Bear Stearns was so highly leveraged, the stock was probably worth zero, and it was unclear if all of the creditors of Bear Stearns would be paid in full. Those who later talked about the “value” of the Bear Stearn’s headquarters building may not have realized that in bankruptcy, sales of all of Bear Stearns’s assets—including the building—might not have covered its debts. Creditors would probably have had to write off bad debts, and there would be nothing leftover for shareholders. Even if every Bear Stearns investment banker hocked their jewelry and watches, it probably wouldn’t be enough.That is the nature of leverage.
It would have looked bad if Jamie Dimon bid, say a penny or a dollar for Bear Stearns’s stock, so JPMorgan Chase bid $2. This was still probably $2 too high, but if it wanted to take control, Dimon had to possess the shares. Jamie Dimon told Congress: “We could not and would not have assumed the substantial risks of acquiring Bear Stearns without the $30 billion facility provided by the Fed. . . . We are acquiring some $360 billion of Bear Stearns assets and liabilities. The notion that Bear Stearns’ riskiest assets have been placed in the $30 billion Fed facility is simply not true. And if there is ever a loss on the assets pledged to the Fed, the first $1 billion of that loss will be borne by JPMorgan alone.”51 As part of the deal, the Federal Reserve agreed to take $30 billion of Bear Stearns’s securities, and JPMorgan Chase put up only $1 billion as