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Bye Bye Bear…

By now most investors have heard the news that Bear Stearns has failed and sent shockwaves throughout the global financial markets. At one point today the TSX Composite Index was down over 400 points (3.4%) to rebound back to finish the day down 300 (2.3%) while the DJIA somehow managed to add 21 points.

In what can only be viewed as an “inventive new process for reporting Chapter 11”, JP Morgan Chase & Co has agreed to buy the struggling investment bank for $2/share. You don’t need to be a math genius to realize that is only 2% of the company’s total market capitalization at the beginning of this year. While rumours and speculation have abounded throughout this credit crisis that Bear was in trouble with two large hedge funds and their opaque exposure to mortgage-based securities; likely no one could accurately guess (aside from those buying $30 March 20th Puts) how close the investment bank was to the brink of collapse. Of course it’s difficult to gauge the extent of exposure Bear had to subprime mortgages and other questionable securities, but do we really need to know? That exposure was bad enough to wipe out more than $14.7B of market cap (late 2007) and value Bear Stearns at literally a fraction of that today.

Bear Stearns isn’t the first shock to materialize during this credit crisis and certainly won’t be the last. For the companies with slightly less exposure time will simply continue to stalk them like predator and prey until the inevitable occurs; where, when, who & how will be the only remaining questions left unanswered at this time. The trouble I’ve been having since last night and most of today with all of this has been: we’re not talking about some regional or obscure company with only a few immaterial shareholders hung out to dry. These are individuals with very deep and influential pockets who regardless of their risk aversion won’t be sitting pretty for the time being; heads are going to roll in the next few weeks and this should be a lesson to significant shareholders here in Canada of companies who decided to play the risk game. A failure of this magnitude (whether millions or billions) is still A LOT of money regardless of who lost out.

What this finally does for the retail investor is hit the big boys where it counts: their net worth. Yes, many of them will have sufficient millions for years to come, but they’re just like any other investor and don’t like losing money; especially on this scale.

Rich Banking for Dummy CEO’s 101:

Rule #1: Don’t lie to rich shareholders
Rule #2: Don’t lose the money of rich shareholders
Rule #3: Either or both of # 1 & 2 will land you in court, jail, congress or all of the above.

With an election coming in the fall of this year I wouldn’t be surprised to see congressional hearings, tar & feathering and some good old-fashioned A$$ WOOP’N to follow the likes of lying CEO’s wherever they try to hide.

Now we’ve seen an investment bank fail, an insurer and who wants to guess if we see a domestic bank next…Any guesses?

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