Bear Stearns Goes Belly Up
The official headline is J.P. Morgan buys Bear Stearns for $2 a share. The real headline is that for the first time since the savings and loan crisis in the 1980s, a major US bank has gone belly up.
The entire deal from offer to acceptance to regulator approval happened in just two days, OVER THE WEEKEND! The reason is so that the stock market did not open while the panic inducing event of a major financial failure hung in the air. The Federal Reserve is guaranteeing the giant sub-prime mortgage liability that took down Bear Stearns which in essence is like buying the company for J.P. Morgan who now gets all of the good parts of Bear Stearns with someone else footing the bill for the really big bad part.
Don’t over read into this news. Bear Stearns was the most exposed company on Wall Street. If anyone was going down, they were going first. It took on too much risk in one area and it paid the price. If another firm goes, then we have to start worrying a lot more.
Your lesson to take from this is that not even big multi-billion dollar Wall Street firms are immune from market risk. With several hundred highly skilled professionals running analysis all day every day, they still got burned by being too exposed to too much risk. The same thing can happen to individuals who chase after the "hot" thing. Today’s hot thing is gold. People can’t stop asking me about it.
Is gold a good investment? Sure. Sometimes, for some of your money, in some circumstances. Is now a good time to cash in your IRA and load up on gold? Never! Long term investing success comes from buying and holding a solid diversified portfolio. Diversification is why J.P. Morgan is getting one of Wall Street’s most storied firms practically for free. J.P. has plenty of sub-prime loans on the books, but it has a lot of other things as well. If their sub-prime goes belly up it will have a hard affect on the company and the earnings, but other assets and investments will be there to rise again.
Expect the markets to react very poorly in the short-term. In the long term, the herd is stronger now that the sickest member has been picked off. Over a ten year period, this event will be a nothing, that you can’t even remember, so don’t freak out.
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