Bear Stearns’ Shareholders Sell Out for $2 a Share

Yesterday, markets in Europe were closed. But in America, they kept doing what they are supposed to do - separating fools from their money.

What is really remarkable - and entertaining - is that some of the biggest fools are the very same people who claimed to be Masters of the Universe, the hustlers who work for the financial industry. That is to say, the separators are being separated from their money too.

And the more you look into it, the more you discover that they are not masters of the universe at all - but slaves to it; nothing but clowns in the great human circus…just like us.

Last week, Bear Stearns' shareholders were separated from a lot of money; in a panic, they agreed to sell out for $2 a share. We wondered how these accountants, lawyers and market-savvy traders could have been so wrong about what they had. When the market closed on Friday they still had billions. When it opened again on Monday, they had almost nothing. How could it be?

Well, now the geniuses have had time to think; and they've come to the conclusion that they shouldn't have sold so cheap. And the buyers - JP Morgan Chase - apparently messed up too. They thought they had closed the deal, only to find that they'd forgotten to get the key documents signed. So when the sellers wanted to go back to the bargaining table, the buyers had no choice. They had to up the ante by 400%. Now, instead of paying $2 a share…they're going to spend $10, or about a billion dollars more.

So, here is the same question we asked last week: how can such clever people be so clueless about what they've got in their own pockets? Is it worth $2 a share? Or $10?

Of course, it is worth what you can get for it. But this is a financial institution. Its assets are marketable. It should be worth exactly the net value of those assets - plus the value of the operating business (typically determined by smoothing earnings over some period of years and multiplying times a capitalization factor - 5 to 20, depending on what kind of mood the buyer is in).

But in the strange new world we live in, however, it's hard to know what those financial assets are really worth. "Hence the billions of dollars sheltered off balance sheets in SIVs and conduits," explains the Economist. But the magazine goes on:

"That game is now up... the counterparties no longer trust each other."

You wouldn't know it from yesterday's market new, however. To hear the papers tell it, investors were greatly encouraged by higher-than-expected house sales and the news from Bear Stearns.

"US stages broad recovery as sentiment improves," is the headline in the Financial Times. Stocks rose, bond yields fell…and the dollar worked its way higher. The Dow went up 187 points. Oil held right at $100.

'Maybe things aren't so bad after all,' they said to themselves.

Or, maybe they are worse.

The reason house sales picked up might be because sellers are getting desperate. There are still a lot of unsold houses - about twice the usual number. Sales are a third down from their peak. And building stocks are about two-thirds below their highs. The stock market tends to follow the housing market, but with a lag of 20 months, says John Authers in the FT. "If that were to continue, it [the stock market] could fall 60% by the end of next year."

Meanwhile, say a prayer for the poor people who labor in the fields of private equity. Steve Rattner of the Quadrangle Group is in London this week. "Since July," he writes in the FT , "not a single private equity deal has been hatched above $4 billion." And deals just done before "the levers fell off the buyout machine" now threaten to sink their Frankensteinian creators.

The buyout firms had hoped to squeeze, re-structure, refinance and flip these deals quickly back onto the same public markets whence they came. This was what the Economist describes as standard procedure in the heady last days of the great financial bubble. Finance became a "game for fees and speculation," it says.

But now, the counter-parties no longer trust each other and no one is particularly eager to get stuck with these heavily-leveraged private equity deals. So they end up as "zombies," says the FT - neither living nor dead - but still drawing breath, salaries and financing costs. They are the equivalent to the "upside down" houses that are worth less than their mortgages; these companies are worth less than the loans taken out to buy them. The Irish telecom - Eircon - is one of these companies. The French builder - Kaufman and Broad - is another. K&B was bought, with plenty of leverage of course, at the very peak. Now, its shares have lost half their value -- which makes the business worth less than the debt it collateralizes.

All of which makes us think that reports of the end of the crisis may be premature.

*** Gold has been correcting. When we looked on Friday, the price had dropped more than $100 from the top.

What to make of it? Has it seen its top? Has it now found its bottom? Or is there more correction to come?

We wish we knew. We were hoping for a correction down to about $850. "Buy the dips," we kept saying. But there haven't been many dips. Now, at $918, is this the best offer we're going to get? Maybe.

Remember, we don't buy gold to make money. We buy it not to lose money. And then, we only buy it when the risks from other forms of wealth outweigh the hope of profit.

What else are you gonna do with your money? Buy stocks? In real terms, U.S. stocks have been in a bear market since 2000. This trend will probably last another 10 years or so. Buy property? Maybe…but you will have to choose very carefully. Put it in CDs? You will get a low yield…inflation rates are going up…and you have the risk of a currency loss.

Gold is no sure thing, either. It went down in price from 1980 to 1999. But there are times when owning gold is safer than other things you might own. This is probably one of those times.

*** What's a conservative to do? Abstain.

There hasn't been a true conservative candidate for president since the Eisenhower years. One by one the old conservatives disappeared - caught up by the military machine, the Cold War hysteria, welfare state politics or the lure of modern macro-economics: "We are all Keynesians now," said Richard Nixon.

Occasionally, there were candidates who still called themselves 'conservatives'…and many who tried to be conservative about this or that. But they were all either big spenders, war mongers, or social engineers.

And now, John McCain -- the best the Republicans could do - is a candidate who is all those things, and more.

"The US is the indispensable nation because we have proven to be the greatest force for good in human history… We have every intention of continuing to use our primacy in world affairs for humanity's benefit."

Alas, John McCain is a world-improver of the worst sort. If elected, he promises to use America's military advantage and her credit as his predecessor has - until it is all used up.

Bill Bonner
The Daily Reckoning Australia

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