Comments on: BSC: Why Paying $5 Per Share for Bear Stearns Might Make Sense

By: BearBull

BearBull — Thu, 20 Mar 2008 19:58:14 +0000

I couldn’t agree more. It will be very interesting to see how the BSC bondholders and options traders will end up as compared to the BSC shareholders who actually hold the power to vote on the deal. Will they sell out, refuse to sell out and blow themselves up, or refuse to sell out and come out huge winners? I think the market suggests the latter. No matter what happens I know JPM is the biggest winner for its roll in all of this!

By: Trent

Trent — Thu, 20 Mar 2008 19:16:21 +0000

There are so many iterations on this, it would boggle the mind. For example my hypothetical bondholder could currently buy all the $7.50 calls and $5.00 puts he wants for a nickel apiece. Your trader who went opposite him and called the stock away could see the bondholder say “backatcha.”

There are so many smart, rich players with ulterior motives that could be playing this thing that my strategy becomes simple: sit on the sidelines and shake my head.

By: BearBull

BearBull — Thu, 20 Mar 2008 18:56:45 +0000

Of course JPM can’t lose – that’s why they made the deal! The question is, can existing BSC shareholders? Is the value placed on BSC after JPM exercises its option on the building and takes its 20% really less than $2/share? I think the market knows it is worth WAY more, despite what the rumors (started by whom? Hmmm… who gains from this?) may suggest.

By: Trent

Trent — Thu, 20 Mar 2008 18:37:32 +0000

JPM would probably like nothing more than to have the vote go against them. They could then take the keys to the building, flip their 20% stake for a quick profit and be done with the deal. Bear, with no place to do business, would be worth less than $2 at that point.

I think a more likely explanation for the call buyers is that people are playing the deal through multi-leg option strategies, buying at one strike and selling at another to hedge risks.

By: BearBull

BearBull — Thu, 20 Mar 2008 18:33:02 +0000

It could be speculators. Or it could be existing BSC shareholders taking the other side of your bondholder trade. (The same shareholders who will vote against JPM’s steal, and pocket $70 in the meantime). Until the vote passes they hold all the cards, not JPM, not the bondholders.

By: Trent

Trent — Thu, 20 Mar 2008 18:17:26 +0000

Point well made re: the American vs European calls. There is certainly a risk that it would be called against the owner ahead of time, regardless of the prevailing market price at that time.

So your point is that, rather than buying the shares at $5 a speculator would go synthetic long using options for a net gain on the option transaction. Then they would call the shares if it looked to go in their favor?

I guess that makes more sense than buying the stock, but with JPMorgan still holding all the cards it seems like an easy way to lose a couple of bucks per share.

By: BearBull

BearBull — Thu, 20 Mar 2008 17:00:07 +0000

…by the way, who do you think bought the call from and sold the put to the bondholders (for a net gain)? Probably the same people who would call the shares away and vote against the deal, wouldn’t you say?

By: BearBull

BearBull — Thu, 20 Mar 2008 16:47:55 +0000

That’s fine logic unless they are American options (callable before expiration).

By: Trent

Trent — Thu, 20 Mar 2008 16:32:03 +0000

True, but that’s one reason I picked October calls. I’m pretty sure the first vote will be before then. The deal would also be feasible, though a bit more expensive, using January 2009 leaps.

By: BearBull

BearBull — Thu, 20 Mar 2008 16:21:06 +0000

This assumes: 1) bondholders can accumulate enough shares from shareholders who would have voted against the deal and 2) the deal gets passed before the shares get called away – if the shares get called away, the bondholders are just out the $70. At current prices it looks like the shares would be called away before the vote…