Surprise Bid Reveals Extent of Market Troubles

The “bear” in The Bear Stearns Companies, Inc. (NYSE/BSC) came to fruition on Monday after surprise news surfaced that JPMorgan Chase & Co. (NYSE/JPM) had a bid on the table to acquire what was left of the embattled Bear Stearns for a shocking $2.00 a share, or just over two hundred and thirty-six million dollars. Investors and shareholders were shocked by the value of the takeover bid, considering that Bear Stearns, once an elite Wall Street investment house, traded at $159.36 on April 25, 2007, and closed at $30.00 on the preceding Friday, representing a market- cap of $30.0 billion.

Call it sticker shock, but the proposed deal is an eye opener on the troubles with the risk in the subprime and credit markets, in which Bear Stearns had significant exposure and was speculated to be on the verge of bankruptcy. But the market appears to feel the bid will be challenged as way too low — the stock price has been bid up to the $5.00 range, as investors hope (or pray) that a higher bid will emerge. I for one am not sure if this will happen if the information on the financial state of Bear Stearns is true. Shocking as it may be, the stock is dead and is purely a speculation.

What is more worrisome is the state of the U.S. financial system and its impact on global financial institutions. The bid was made because the Federal Reserve said that it would guarantee up to $30.0 billion of the credit that is at risk.

In my view, it could get worse, as the extent of the financial impact of loans and mortgages may yet to be uncovered. This uncertainty makes financial stocks a very risky bet at this time and what happened to Bear Stearns is a clear reflection of this. There are also concerns towards Lehman Brothers Holdings, Inc. (NYSE/LEH), which is believed to have the second largest exposure to the credit markets.

Stay clear for now and avoid the temptation to buy until the full extent of damage is known.