Lawrence Kudlow is not happy that Bear Sterns was purchased by JP Morgan:
Did Bear Stearns really need to go down in flames? It’s a question that needs to be asked, and my answer is no. Of course, I don’t know the value of Bear Stearns’s assets, and whether they could have served as collateral for private or government loans … Watching the venerable old firm pawned off to JPMorgan Chase for a couple hundred million bucks – basically a bag of peanuts – is painful to me. The building itself is worth at least $1.5 billion … The fact is, Bear shareholders got creamed with the $2 per share purchase price. The shareholders include all the men and women who’ve worked there for years, and who own roughly one-third of the firm’s equity.
This argument is very odd at several levels. The day before this post, Kudlow praised the merger. But even more odd is how Kudlow does not even get simple balance sheet accounting. Let’s take a look at the book value of the assets and liabilities of Bear Sterns as of November 30, 2007. Its total liabilities were over $383 billion. While Bear Sterns had about $10 billion in PP&E and other assets, most of its $395 billion in assets represented financial assets. If the market value of these assets fell below 97 percent of the book value of these assets, then the value of liabilities would exceed the value of its assets. Looking at the asset side of the balance sheet to access the market value of equity is incredibly stupid when a firm has extensive debt.