Some Bear Issues

Posted on CNBC JP Morgan Agrees to Buy Bear Stearns for $2 a Share

• JPMorgan Chase said Sunday it will acquire rival Bear Stearns in a deal valued at $236.2 million--or $2 a share--a stunning collapse for one of the world's largest and most venerable investment banks. The last-minute buyout was aimed at averting a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system

$2 a share?

Here's an interesting point from Bloomberg news. JPMorgan Chase Buys Bear Stearns for $270 Million

• Joseph Lewis, the second-largest shareholder in Bear Stearns Cos., wasn't planning to reduce his stake, a person close to him said March 11. Lewis, a 71-year-old billionaire, has put in more than $1 billion into the firm since September, paying as much as $150 for a share.

Mr. Lewis isn't going to be happy camper!

And one of the big issue is on the current bailout of Bear Stearns. One of the interesting comments was from John Mauldin's piece, Muddle Through and Your Long Term Returns , posted on the weekend.

• The next crisis? I read a very chilling piece from Michael Lewitt this morning. He speculates on what if the rumors were true that Bear Stearns is basically bankrupt. Bear is in the too big to fail category. They are at the heart of the chain of Credit Default Swaps which run like fault lines throughout the world's financial system. If Bear were allowed to collapse, it would simply cascade throughout the world so fast it would truly make the current level of the credit crisis seem small potatoes.
  
  So, why can I be so sanguine? Because the regulators (the Fed and the SEC) would step in and whatever large bank was failing would be merged or bought very fast. Liquidity and assets would be provided. The Fed and the rest of the world's central banks get that we are in a crisis. They will do what is necessary. Those of us sitting in the cheap seats in the back of the plane may not like it, as it will look like a bailout of the big guys who caused the problem, but you have to maintain the integrity of the system. A hedge fund here or there can go, but not one of the world's premier banks.

And of course the most interesting piece was Who Traded 55,000 Bear $30 Puts Tuesday?

• This past Tuesday, when Bear Stearns(BSC - Cramer's Take - Stockpickr) was trading around $65 a share, there was huge put volume in the March $30 strike. Over 55,000 contracts traded that day at an average price of 15 cents a contract. This is an extremely unusual trade in terms of the number of contracts and how far out-of-the money those options were at the time. This begs the question of why someone would execute such a transaction.

!!!!

• First, it's important to understand that buying a put gives you the right to sell the stock at the strike price. So to buy a put that requires the stock to decline over 50% is essentially a bet that the company is possibly on the brink of going out of business or about to deliver some terrible news.
  
  Remember, these options expire on March 20, so that left only 10 days for some event to occur that would cause these puts to go into the money and have some value. So it appears that as rumors began swirling early in the week that Bear was having liquidity problems and might possibly be bordering on insolvent, someone took that to heart and bought the puts as disaster insurance. And today came news that several banks, including Goldman Sachs (GS - Cramer's Take - Stockpickr), would no longer act as a counterparty to any transactions with Bear. The inability to execute trades would essentially put Bear Stearns out of business.

Incredible!

Yes, some trader just made insane money (easily over 20 million!)... but comeon... surely they 'knew'!!!!!

Btw where is Auntie Martha?