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.
Why?
THEY WANT TO MAKE SURE THE DEAL GETS DONE!
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).
From the Big Picture -- http://bigpicture.typepad.com/
