Monday, March 17, 2008

this is why dimon is the world's best banker

it's still early in this game, obviously, but jpm getting bsc for about 250 million looks to me to be the deal of the decade, if not longer. dimon is simply the world's best banker. he wanted bsc for quite some time, but didn't want to buy with his stock at 40 and bsc at about 150, last year. so he waited, and didn't destroy his balance sheet going after fleeting, short term gains with mortgage-backed toxins.

so did the fed "play favorites" by "giving" this choice but bruised property to jpm? well, sort of. obviously it had to be an american institution, and, who else is there? bac's dealing with cfc; c couldn't do it at this time; no one's left. and jpm had the smarts to stay relatively clean and be ready in case something like this came up.

i happen to think they pulled $2 a share out of a hat; $1 looks ridiculous and dimon wouldn't pay more - so it's $2. $2 i think silences any potential strike suit cases and that is it. it is capitalism in its rawest form - and it's gruesome when it happens.

in terms of the deal price, it doesn't matter what bear's stated book was. this past weekend its stated book was $2 per share. why? because jpm was THE only credible buyer,was willing to execute a merger agreement without any conditions and that is what they were willing to pay under those circumstances. the headline number is $2 per share, but if you listened to the call there are $6 billion of contingent/transaction liabilities being assumed which is actually around another $60 per share being transferred to creditors. the fine print is obviously on these deals - essentially this is an out of court bankruptcy deal.

buy my own position on this deal is clear: i think it's a grand slam for jpm; the building alone is worth more than $2/share. they'll probably hang onto a number of great people and jpm gets into some businesses in a big way that they've been coveting for some time: especially the prime brokerage business. here's a very rough, bare bones estimate of bsc's true worth right now (in my opinion):

about 5 billion in illiquid stuff

about 3 billion in maximum loss exposure on the 33.5 billion retained interest in "assets of variable interest entities and mortgage loan special purpose entities."

so that easily, in my opinion, covers any worst-case scenarios regarding bsc. a huge win for dimon and jpm.

oh, by the way, gasparino's been on cnbc harping about shareholder activists and the like getting a better price for bsc or some other near-impossible scenario: no way. if this deal falls through, jpm's written into the deal an option to purchase the building at an attractive price and of course could kick everyone out the next day. also, jpm's running bsc RIGHT NOW - obviously all of their liquidity would instantly go away that's been put into bsc; and finally, the fed would surely pull their support as well - this deal goes through as is.

disclosure: long jpm and wishing i had alot more

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