Bear Stearns, Northern Rock and Société Générale

Posted on Monday, 17 March 2008. Filed under: Commentary, Mergers |

The big news is that Bear Stearns has been purchased.  Put out of its misery.  JP Morgan and the Federal Reserve have ridden to the rescue — some would say at the 11th hour — to make sure that the malaise surrounding Bear Stearns can be contained.  There’s lots of questions about whether Bear Stearns, the worst-hit firm on the Street from the credit and liquidity crisis, will be the only casualty or just the first.  Stay tuned.   Just as with the US presidential primaries, nothing seems to work as anticipated.  For staying up-to-date on this story, see the excellent coverage in the Financial Times., and for breaking news, FT Alphaville.

The Federal Reserve appears to have played a very large role in the sale — and reportedly is guaranteeing up to $30 billion in Bear Stearn’s less liquid assets.  The firm itself is being purchased by JP Morgan for a mere $2 per share, demonstrating clearly that equity shareholders should bear the brunt of risk when a company does poorly — and isn’t that an understatement of performance!  Note that little more than a year ago, Bear Stearns’ share price was $169.  A loss in share price of almost 99%;  that beats the loss in market capitalisation that AOL Time Warner achieved (97%) when they merged.  In both cases, the business models were flawed.

So, what’s the link to Northern Rock and Société Générale?  Readers of this blog will already know my thoughts about both (see here about Northern Rock and here about SocGen).  Certainly both Northern Rock and SocGen had flawed business models as well, and competitors were not surprised when either one had their near-fatal problems (Northern Rock also in the credit crisis).  Neither Northern Rock (with it’s UK version of the Bear Stearns market crisis impact) and SocGen (with it’s rogue trader(s) and the firm’s reaction to that crisis) should be allowed to remain independent.  Regulators in both France and the UK should have quickly encouraged another bank to take over where management failed those two companies.  And equity shareholders should have shouldered the impact. 

Note as well that Bear Stearns’ advisor, Lazard, was apparently trying over the weekend to shop Bear Stearns to other banks as well, including Barclays, HSBC and the Royal Bank of Scotland (who recently purchased ABN AMRO).  I hope this is noted by the French government, who appear to be trying to protect Société Générale from a foreign buyer.  This wasn’t a concern in the US, I’m sure, and the reason that Bear Stearns ended up in the hands of another US bank was likely to be more an issue of speed and simplicity than anything else.

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2 Responses to “Bear Stearns, Northern Rock and Société Générale”

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Scott,
Who you think is next in queue for collapse?

Lehman, Citi, ??

On another track – some thoughts on Sprint Nextel merger would be useful (meaning Sprint writting off 30bn$ of Nextel value)

DJ

Northern Rock fell because management, and regulatory were not competent.
SocGen fell on a rogue trader, still, its business model works.

Nobody can say that Northern Rock and Socgen situations are the same.


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