Depressions & Recessions Are Era’s, Not Events

The demise of Bear Stearns is rippling across Wall Street today. The market is gyrating wildly as investors vote with their pocketbooks, and it will be days and weeks until we find out the ultimate winners and losers in the latest pitched battle between the bulls and the bears.

What is stunning is that it took less than three weeks for Bear Stearns to be valued at 1% of what is was just seventeen days ago! This is a modern day run on a bank, and it didn’t take much time to bring Bear Stearns to its knees.

JP Morgan may also have the steal of the century here. They get all of Bear Stearns for $236mm and the implicit guarantee by the Fed that any additional losses won’t be pinned on them! Here’s the juicy part…the esteemed headquarter’s building of Bear Stearns located in Manhattan is worth well north of $1 Billion. Let’s assume it’s nuclear winter for every single facet of Bear Stearns other than their prime real estate – which I don’t think is the case, therefore, JP Morgan must be making out like a bandit!! Maybe we shouldn’t be surprised that BSC is trading above the $2/share “offer” at the present time. Can you say “shareholder lawsuit??” This one will be entertaining. That said, I feel for the 14,000 employees, especially the ones who are down on the food chain, not directly involved in creating and packaging sub prime loans.

Mike Mayo at Deutsche Bank hits the nail on the head with this comment on Bear Stearns: “One reaction is shock that a company that reaffirmed its book value at around $84 on Wednesday can be worth $2 per share four days later on Sunday.”

Other banks and brokers are selling off significantly again today. Where does it all end? It occurred to me that bear markets, recessions, and even depressions take time to run their course. These are not events, but era’s. We could argue that we are in year eight of the great unwind; an era that began with the tech bubble on 2000, leading to the real estate bubble, emerging market bubble, and perhaps now a commodity bubble. Economies and capital markets are cyclical, and perhaps we are “only” halfway through this era’s re-calibration. Time will tell.

We’ll let the market be our guide. Good Luck.