Transcripts

NBR-Transcripts: March 17, 2008

Monday, March 17, 2008

JPMorgan Chase Buys Bear Stearns for $2.00 a Share

SUSIE GHARIB: A day of shock on Wall Street today in the wake of Bear Stearns fire sale to JPMorgan Chase for $2 a share. Just three months ago, Bear traded above $100. Also part of the deal: the Federal Reserve agreed to provide a $30 billion line of credit to JPMorgan to help cover Bear's potential liabilities. It's the first time the Fed has made such an offer since the great depression. We have two reports tonight looking at the Bear deal and whether other financial giants are facing a similar fate. We begin with Suzanne Pratt in New York.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is widely accepted on Wall Street that JPMorgan chase may have just made a sweetheart deal. By buying Bear Stearns for $2 a share or $240 million, JPMorgan is getting the beleaguered investment firm for a fraction of its estimated book value. It's also paying about one quarter of the value of Bear's headquarters building, located in midtown Manhattan. Sandler O'Neil analyst Jeff Harte, whose firm does investment banking and non-investment banking business with JPMorgan, says the purchase is a smart move for JPMorgan.

JEFFERY HARTE, BANKING ANALYST, SANDLER O'NEIL: Assuming the deal closes, it could turn into a home run. They are paying what seems like a very low price and getting some very nice assets that I think will work out well for them.

PRATT: For Bear shareholders, experts say it's hard to view the transaction as anything more than a fire sale. Many are questioning whether Chapter 11 might be a better option as perhaps Bear's assets could fetch more in liquidation. Some angry shareholders reportedly are already taking legal action. Bear stock, which closed on Friday at $30 a share, closed today near $5, $3 above the purchase price. Experts say the differential suggests some investors are hoping for a white knight.

HARTE: You begin to start thinking that some investors are willing to take the chance that a bigger bid will show up or that maybe Bear Stearns can get back on its feet again and actually realize something more than $2 a share in book value. In this current environment, I am skeptical that that could play its way out though.

PRATT: That's because even at $2 a share, JPMorgan is still taking on considerable risk. The nation's third largest bank says it's putting aside a total of $6 billion to account for litigation and other merger costs. Towers Perrin M&A expert Mark Arian says not only are distress acquisitions costly, but often they just don't work.

MARK ARIAN, GLOBAL LEADER, M&A, TOWERS PERRIN: You've got a situation where key talent may leave. You've got an issue where you've got organizational cultures that are very different, very disparate. You've got a situation where there's been very little integration preparation. So, a shotgun marriage has all the trappings of failure in that it can't lay good track.

PRATT: Still, others say if anyone can make this deal work its JPMorgan and CEO Jamie Dimon. Both have solid reputations for turning distressed assets into profitable businesses. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Erika Miller. The collapse of Bear Stearns has investors worried other major financial firms could soon follow. Morningstar analyst Ryan Lentell says Lehman Brothers is probably the most vulnerable.

RYAN LENTELL, FINANCIAL ANALYST, MORNINGSTAR: It does face similar challenges in that it did have a lot of its business in the securitization market although it is a much more diversified business model.

MILLER: Today, Moody's Investors Service lowered its ratings outlook on Lehman's long term debt from positive to stable. For its part, Lehman maintains its liquidity position is strong. UBS shares fell 11 percent today on speculation it might be next to fall because it has been hit hard by sub-prime losses. But Lentell says Europe's biggest bank by assets probably won't go belly up.

LENTELL: It has a depository funding base which is much more stable funding than complete reliance on the repo market, as many of the investment banks in the U.S., the Lehmans, the Bears, the Morgan Stanleys are much more reliant on the short term debt markets.

MILLER: Lentell says JPMorgan Chase is in the best financial shape of all the major banks because it has relatively little sub-prime exposure. Market strategist Tony Dwyer warns investors against buying financial stocks right now.

ANTHONY DWYER, EQUITY STRATEGIST, FTN MIDWEST SECURITIES: It may be just a little bit too early because a lot of the financials, you don't know what they own yet and how its valued. Until you get a better handle on that rather than guess, we would wait to see the turn.

MILLER: But Dwyer does not think the trouble in the financial sector will pressure the overall stock market for long.

DWYER: Over the next three hours or three days, the outlook is very uncertain for stocks. Over the next three months to the next three quarters, I think it is very positive. Historically the market makes a low when you have a financial crisis and the Bear Stearns situation is certainly that.

MILLER: Investors will get more details on the health of the financial sector tomorrow when Lehman Brothers and Goldman Sachs report first quarter earnings followed by Morgan Stanley on Wednesday. Erika Miller, NIGHTLY BUSINESS REPORT, New York.

In Addition To Interest Rates What Else Can The Fed Fix?

SUSIE GHARIB: In Washington today, President Bush and Treasury Secretary Paulson tried to reassure investors around the world that the American financial system remains strong. Leading the effort to keep it in good health, the Federal Reserve. Fed policymakers meet tomorrow to decide whether to cut interest rates once again. But as Washington bureau chief Darren Gersh reports, that's not the only tool in the Fed's tool box to fix the financial crisis and the weakening economy.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Imaginative, unprecedented, aggressive. Those are some of the adjectives being used today to describe what the Federal Reserve is doing to prop up the U.S. financial system. Economist Mark Zandi says Fed Chairman Ben Bernanke had no choice but to step in and engineer a liquidation of Bear Stearns.

MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: It says the times we are in are very tumultuous. The financial system is in disarray and it's not just one part of the system. It's from top to bottom, from the municipal bond market all the way up to all the commercial banks.

GERSH: At the White House, President Bush met with economic advisers, praising the Fed, adding the United States is on top of the situation.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Our financial institutions are strong and that our capital markets are functioning efficiently.

GERSH: By taking on $30 billion in assets from Bear Stearns and offering loans to investment banks, the Fed has sparked complaints it is bailing out Wall Street. In this case, Mark Zandi says it's really a bailout for the nation.

ZANDI: It's a bail out of both of us. If the Federal Reserve did not step in, then the financial system would arguably unravel and that would be to everyone's detriment. It means a weaker economy, higher unemployment, so we would all suffer.

GERSH: Fed watchers expect more aggressive action to come. Vince Reinhart is a former top staffer at the Fed. He expects a deep interest rate cut after the Fed meets tomorrow.

VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: I think what they should do is try to draw a line under this episode by being aggressive. Market participants expect somewhere between three quarters and 1 percentage point of ease by the Federal Reserve. This is a good opportunity to not surprise them.

GERSH: Reinhart thinks the Fed could do even more, perhaps announcing it will buy up mortgage securities issued by Fannie Mae and Freddie Mac. That would support the housing market and free up capital tied up on balance sheets around the world. But Reinhart cautions all the Fed can provide is temporary cash, not the long-term capital Wall Street really needs.

REINHART: It's not a permanent fix. The permanent fix will have to be cash injections into these institutions and we've got to wait for that.

GERSH: As aggressive as the Fed has been, former Fed Governor Lyle Gramley says the central bank can't solve this crisis on its own.

LYLE GRAMLEY, SR. ECONOMIC ADVISOR, STANFORD GROUP: I think, probably, the Fed has done about all it can. It will lower interest rates further and that will help a little. I'm not sure it has any more innovative tools given what it has already done, which has gone a very long ways with innovation. And I do think that the next step probably has to come from the Federal government.

GERSH: By the time this is all over, economists say they wouldn't be surprised to see the Fed lower its key short-term interest rate to 1 percent or even lower if necessary. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.

One on One with Dick Bove, Banking Analyst, Punk and Ziegel & Co.

SUSIE GHARIB: Back now to our top story, the Bear Stearns bail out and whether other big financial firms are at risk. Joining us now with more analysis, Dick Bove, banking analyst at Punk and Ziegel. Hi, Dick.

DICK BOVE, BANKING ANALYST, PUNK, ZIEGEL & CO.: Hi, Susie, how are you?

GHARIB: I'm fine, thank you, Dick, you know, some people are describing JPMorgan's purchase of Bear Stearns as a home run. What do you think?

BOVE: I don't think it is a home run at all. I think they bought a company which was if deep trouble. It was bankrupt. It had negative cash flows and whose assets are questionable at best. So I think that the risks that JPMorgan is taking on here, the fact that they are going to have to lose $6 billion pretax in the next 12 months as a result of doing this merger would suggest that it is a high-risk venture.

GHARIB: Is that why the stock of Bear Stearns was trading above the offering price JPMorgan offered $2, Bear Stearns closed at above $4. I mean what do you make of that?

BOVE: Well, I think that the simplistic answer would be short- covering because so many people made some much money on the downside. But there are two other answers. One is that a lot of people feel that in liquidation, the assets of Bear Stearns would be worth a great deal more than the $2 per share. Unfortunately, however, there really aren't that many assets at Bear Stearns which are appealing. They've got a building and I'm sure that that has some value. But also they have a prime brokerage business which is basically fallen apart and has very little value. They have an asset management business which is being sued, so I don't think that's very valuable. They have a retail sales force which will be leaving the company in droves should JPMorgan not take it over, so that's not terribly valuable. So I'm not sure that there are very many assets there that in liquidation would create value. And finally, I don't think there is any white night. A white night would have to be doing an aggressive takeover against management's desire, against the desire of the Fed, against the desire of the president of the United States just isn't going to happen.

GHARIB: So is JPMorgan take on risk of its own by doing this rescue operation?

BOVE: Certainly. I mean they are taking on a balance sheet which at least at the end of the fourth quarter was $395 billion in size with something like $190 billion in a variety type of securities. And it doesn't know really what those securities are. I mean it hasn't had the time in a day and a half you can't go through and really learn and understand what is in that securities portfolio. So I think the risks in this transaction are quite high.

GHARIB: Let's talk about the health of other big financial firms in the financial sector. Lehman, Goldman Sachs and Morgan Stanley report earnings this week. What are your expectations and are they at risk?

BOVE: Well, I think the first question is are they at risk because basically today all of these stocks went down sharply. Even Lehman Brothers in particular was being attacked. I think what the market has failed to grasp is that the Federal Reserve has done something that is actually very innovative. They have guaranteed in essence the assets of these companies which means that it would take someone who had the ability to bust the Fed in order to take down Lehman. Because if you try and take down Lehman and the Fed is going to give you -- give Lehman all of the money it needs, you got to break the Fed in order to get at Lehman, so it just isn't going to happen. It is not realistic. In terms of the earnings that will be produced tomorrow and Wednesday, they are going to be pretty poor. And they are going to reflect markdowns in securities and they're going to reflect the fact that the core business activities of these companies have been negatively impacted.

GHARIB: Let's go back to what you were saying about the Federal Reserve. Do you think that the Federal Reserve can handle this financial crisis by itself?

BOVE: Actually, I don't. I think that the Federal Reserve needs help and I think it needs help from the other central banks around the world. Because even though the Federal Reserve is a pretty potent organization, it only has $920 billion in assets. And JPMorgan for example, has almost twice that amount. Citigroup has more than twice that amount. So the amount of, if you will, guarantees which the Federal Reserve is putting out there is on roughly $2 trillion or more in securities and it only has $920 billion to back up those guarantees.

GHARIB: Quickly we have just a few seconds left, so what is the bottom line here? Where are we in this financial crisis? Are we near the end so that the Fed is not at risk?

BOVE: I think we are extraordinarily close to the end because basically speaking, either the Fed's actions are going to calm the markets which I actually think it will do or the Fed is going to fail to be able to back its guarantees, in which case we're in terrible trouble.

GHARIB: Let's hope not. Thank you so much Dick for coming on the program and explaining it all.

BOVE: Thank you, Susie.

GHARIB: My guest tonight, Dick Bove, banking analyst at Punk and Ziegel.

Kevin McCormally's Tax Tips-Audit Odds

SUSIE GHARIB: Well, it's that time of year again, time to get out those tax forms, the calculator and everything else you need to file your return. In an effort to help, every Monday between now and April 15, we'll bring you our annual tax tips series. Tonight, our tax guru Kevin McCormally, executive editor at "Kiplinger's Personal Finance" says there's no need to fear the taxman.

KEVIN MCCORMALLY. EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: Tonight, let me paraphrase an old Irish toast: may the road rise to meet you, the wind be always at your back. And may your tax returns be safe from audit all the days of your life. You certainly don't need the luck of the Irish to avoid an audit. And that's true despite what you've been seeing on TV and reading in the papers. Springtime is always prime time for stories about IRS enforcement activities.

An awful lot of ink was spilled over the Wesley Snipes trial for example. He was acquitted on tax fraud charges but nailed for failing to file a return. And it's not happenstance that the IRS chose this time of year to open its Al Capone vault to the public, to remind us all that the tax agency brought down a gangster the FBI couldn't.

But the fact of the matter is that very few tax returns are ever audited. The latest stats show that one average, the IRS audits just one of every 97 returns. And, most of those are handled by mail, not man-to- man. Even on returns reporting between $100,000 and $1 million in income, only one in 60 goes through the wringer. The IRS loves to flash its tough- guy image this time of year to keep us all on our best behavior. I'm not telling you this to encourage you to play the audit lottery. I want you to be honest. After all, every taxpayer who cheats, means honest men and women have to pay more. But I don't want you to be afraid of the IRS. If you have a legitimate tax break coming, a home office deduction or a big charitable contribution or a casualty loss or whatever, take it. Skipping it, in hopes of avoiding a possible audit, would be like paying extortion and that would be silly as well as costly. I'm Kevin McCormally.

Paul Kangas' Stocks in the News

PAUL KANGAS: Wall Street was taken aback by the Fed's Herculean effort to stem the Bear Stearns crisis, suggesting it was a lot more serious than first thought. The result was a sharp opening sell off which sent the Dow tumbling 155 points at the outset of trading while the NASDAQ Index lost 34 points. Bargain hunting brought the blue chips back to Friday's closing levels by mid-day. Then another wave of selling sent them to the early lows in mid-afternoon, followed by a late rally which resulted in a mixed close. The Dow Jones Industrial Average ended with a gain of 21.16 at 11,972.25. The NASDAQ closed down 35.48 at 2177.01, while the Standard & Poor's 500 Index lost 11.54 ending at 1276.60. In the bond market, the 10- year note rose 1 12/32 to 101 20/32, putting the yield at 3.31 percent. Big board volume leader on 44.4 million shares, Citigroup (C) down $1.19 in that basically weak group again. Then Lehman Brothers (LEH) down $7.51, but believe it or not, it traded as low as $20.55 this morning. UBS downgraded it from "buy" to "neutral" and there is speculation that Lehman could be the next in need of a Bear Stearns type bail out which the company strongly denies.

JPMorgan Chase (JPM), one of the good gainers in the Dow Industrial Average, up $3.77. Some analysts believe that the Bear Stearns takeover could turn out to be a real bargain as we've heard. Also the company is the lead underwriter in Wednesday's Visa initial public offering, which is likely to be a great cash generator for the underwriting team.

General Electric (GE) moved up $0.51.

And then Bear Stearns (BSC) itself closing at $4.81 with that $26.04 loss. It traded as low as $2.84 during the day, came back a bit.

Washington Mutual (WM) down $1.33.

Bank of America (BAC) managed to gain $0.27.

Ford Motor (F) an $0.18 loss.

Merrill Lynch (MER) down $2.33.

And then Wachovia (WS), tenth in volume, losing $0.88 a share.

MF Global Limited (MF) plunging $11.25. There were early reports that some of its clients were taking money out of the firm, but the company said no, that's not happening. It has ample funds.

Elsewhere we had another big loser in National City (NCC) down $5.63. Standard & Poor's linked the weakness to JPMorgan's acquisition of Bear Stearns which reduces the possibility of a National City takeover.

CSX Corp. (CSX), the big rail company, up $2.31. It sees first quarter earnings up 42 to 48 percent from last year. It's boosting its quarterly dividend 20 percent and it'll buy back up to $3 billion of its own stock by the end of next year.

Intl Paper (IP) down $2.79. It will acquire Weyerhauser's container board, packaging and recycling business for $6 billion. Weyerhauser stock was up $1.09 at $63.06.

Conoco Phillips (COP) down $1.61, even though Goldman Sachs upgraded it from "neutral" to "buy" but it cut its price target from $100 down to $96 a share.

The big European firm, Siemens Ag (SI) losing $19.44. The company says that its current quarterly earnings will be cut by 900 million euros due to order delays.

Shareholders of Tempur-Pedic (TPX) probably won't sleep too well tonight, down $6.36. The company sees first quarter sales in a high single digit decline from a year ago.

National Financial Partners (NFP) down $5.39. A "Barron's" article this week says despite the chart drop from a high of $57 a share, the stock is still vulnerable to further weakness.

Conseco (CNO) off $1.30. The company says preliminary fourth quarter results will show a loss of $0.39 a share.

Apple (AAPL) topped the NASDAQ active list, up $0.12.

Google (GOOG) however down $18.05.

Microsoft (MSFT) $0.34 gain.

Research in Motion (RIMM) down $3.57.

Baidu.com (BIDU) down almost $21 a share.

Cisco Systems (CSCO) a $0.03 loss there.

$0.19 gain in Intel (INTC).

Yahoo! (YHOO) $0.86 loss.

First Solar (FSLR) down $6.94.

And then Oracle (ORCL) with a $0.24 loss.

Bladelogic (BLOG) moving up $3.78. BMC Software will acquire the firm for $28 a share in cash.