Bullish noises from Citigroup analyst Prashant Bhatia this morning, via DealJournal’s
Dana Cimilluca: apparently Bear Stearns is going to have to end up owning "only"
$9 billion of the debt it’s underwritten in LBOs announced but not yet paid
for.
Bhatia estimates a reduction in earnings per share this year of 2% to 5%
for the five firms. If the analysis is on the mark, the securities firms’
stocks may have been oversold. Each has fallen 7% (Merrill) to 16% (Bear)
in the past month.
Roddy Boyd has the
bearish view: it’s not just about the LBO debt.
According to Bear’s most recent quarterly filing, with a capital base of
$13.3 billion, Bear has to support over $423 billion in assets – $200 billion
of which is securities and so-called mortgage- and asset- backed special purpose
entities.
In other words, never mind the prospect that $423 billion in assets is going
to become $432 billion in assets. That we can live with. The real problem is
what happens when the $200 billion in credit-based securities gets marked down
by, oh, 5%. Suddenly that’s a loss of $10 billion, which all but wipes out Bear’s
equity. And at the same time, Bear’s revenue stream – which was always
very dependent on mortgages – is drying up to a trickle.
I find the bearish case more persuasive than the bullish, I must say. Which
is probably a buy signal. When Salmon capitulates, you know we must be reaching
bottom.