you hate to see another tired man lay down his hand

In the wake of the subprime mortgage collapse, legendary brokerage house Bear Stearns lost 80% of its value in the year up to this past Friday, and 89% of its remaining value over the weekend. J.P. Morgan, in a deal financed by the Federal Reserve, will be buying Bear Stearns for $2 a share, or a total of $236 million (not billion).

Here’s a short list of better ways to spend $236,000,000 (inspiration for this idea c/o Brad at Sadly,No):

Alex Rodriguez: Possibly the best hitter of the modern era, Alex Rodriguez is the third baseman for the New York Yankees. His current contract is guaranteed by the Texas Rangers (not as storied a bank as the Federal Reserve, but no slouch) through 2010. J.P. Morgan could pick up the remainder of his contract with the Yankees (extended through 2018 after some recent shuffling) for probably a little shy of $236M. They’d then have an experienced hitter in the prime of his career, rather than the decrepit remains of a once great investment firm.

236,000 ounces of gold bullion: Gold recently made an historic close at over $1000 / oz. Valued for its rarity and luster in ancient days, gold’s value on the modern market is as a hedge against inflation. As the dollar devalues, the price of gold skyrockets. And with Bernanke cutting the Fed funds rate late on Sunday (and probably cutting it again later this week), the price of gold will probably continue to climb. Therefore, J.P. Morgan could invest $236M and end up with, maybe, $237M after holding their investment for a while. This would be preferable to throwing two hundred and thirty six million dollars into a fire.

The Harvard Business School Classes of 2008, 2009 and 2010: The Harvard Business School remains one of the most competitive and prestigious graduate business programs in the world. Harvard typically accepts between 1000 and 1050 students for its MBA program every year. Tuition runs about $77,150 per year (that includes room, board and expenses). J.P. Morgan could pay the entire cost for three classes full of MBA students – let’s say only those currently enrolled, so as not to flood the poor dears in Cambridge with cheapskate applicants next year. A fancy letter could arrive in the mail, “Dear So-and-So: Your entire tuition has been reimbursed thanks to a grant by J.P. Morgan. If you’d like to learn more about what America’s greatest investment firm can do for you, please contact our local recruiter.” Presuming that only one student in fifty ends up working for J.P. Morgan after receiving such generosity, do you seriously doubt that 63 Harvard Business School graduates couldn’t bring more than $263,000,000 to the company over their careers? Or is making sure your buddies at Bear Stearns get to retire with a decent nest egg a wiser bet?

This is Bear Stearns we’re talking about: a firm that weathered two World Wars, the Great Depression and any number of recessions until this past weekend. And this is the blow that leveled them. Bear Stearns was one of the heaviest riders on subprime mortgage bonds, but they were not the only one.


14 Responses

  1. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. I think this is more about salvaging what’s left of the firm than bailing out the owners of Bear Stearns. Still, you’ve got a point.

  3. What’s worth salvaging? Desk phones and coffee machines? Presuming $2 is a fair price (and would Bear Stearns have taken it if they thought they could do better), what commodity of any kind is worth holding if it’s lost 98.7% of its value in a year?

  4. I’m still trying to figure out how a firm that owns a building worth upwards of $1 billion could sell for less than $250 million. Either they were in deeper trouble than anybody thought (likely), or they got hosed.

  5. Bear Stearns is not a five tool player.

  6. My guess: they kept buying in the hopes that housing, and the market as a whole, would rebound before anyone called them on it.

  7. They have plenty of assets and investments that still have some value, it’s just that no one can tell what the risk is. If anything, the thought is that JP Morgan got quite a steal and BSC shouldn’t have sold that low. On that:

    Talking Points Memo:

    Berkeley economist and reality-based blogger Brad DeLong suggests two possibilities. One, that Bear Stearns execs were unwilling to go into bankruptcy because of a various forms of criminal liability they would face — and that everyone would be so pissed about the collateral damage of the bank’s collapse that everyone would want to not only execute them but also have them drawn and quartered (in case you only know the phrase and not what it actually means: not pretty). Two, there’s so much crap on Bear Stearns’ books that $2 per share is just a fair price, even with the Fed assuming a lot of the potential liability.

  8. […] Mr A wrote an interesting post today onHere’s a quick excerpt236000 ounces of gold bullion: Gold recently made an historic close at over $1000 / oz. Valued for its rarity and luster in ancient days, gold’s value on the modern market is as a hedge against inflation. As the dollar devalues, … […]

  9. I rarely agree with DeLong, but that’s not bad speculation.

  10. I’m not familiar with corporate bankruptcy laws, but if they have a massive amount of debt dwarfing their assets, does it really matter how much they own?

  11. Why would JP Morgan care if it’s a good buy? It’s not like they’re risking their own money.

  12. Brian – Well, they’re putting themselves in debt to that cruel taskmaster Ben Bernanke. You know the man always calls in what he’s owed. That iron hand on the tiller. That cruel millstone grinding the poor, honest investment house down.

  13. couple points as I enjoy some back issues:

    A-Rod opted out of his Texas Ranger originated contract and signed a totally new one, meaning the Rangers are on the hook for nothing. As a Texas resident, I can rejoice in knowing that Tom Hicks (Rangers’ owner) can pocket more money while the team stinks.

    On Bear Stearns, there’s a different look at the purchase price at this link (I’m not all that technically suave, so I have to just paste the link this time.

  14. Yeah, the upward revised price for Bear Sterns is a new development. No reason not to help your buddies out if the Fed’s co-signing the loan, I guess.

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