Why Bear's Shares Are Above $2

Are investors just in denial, or do the people bidding up Bear Stearns' stock know something?

The building alone, they say, is worth $8 a share. Maybe all the copiers, BlackBerrys, and laptops could command a few bucks. Rip out the pipes, faucets, and elevator doors, and surely you could fetch top coin in this metals-crazed market.

Those are just some of the reasons, legit and otherwise, that shares of Bear Stearns (BSC) never did hit their now notorious $2-a-share, Fed-supervised "take under" price. Bear shares bottomed at just under $3 on Mar. 17 before they surged to as much as $8.50 on Mar. 18. Of course, this is all so much cold comfort to anyone who got in at $170 last year (or even $70 last week). Still, the fact that the stock is trading at triple its agreed-on buyout figure means 1) something is being lost in translation, 2) something else is afoot, or 3) the Wall Street arbitrageurs, who play spreads of a few nickels and dimes, must be having a collective aneurysm. Maybe all of the above.

What the mortgage-backed hell is going on?

The First Stage of Grief

A good measure of denial, for starters. After all, if you are a Bear shareholder, was it ever remotely conceivable just days ago that the firm had so much toxic waste on its books that its liabilities would come to represent almost the entirety of its enterprise value? Until recently, the 85-year-old brokerage had never posted an unprofitable quarter. Did any Wall Street analyst or short-seller dare to posit a Bear target price in the single digits—anticipating outright collapse? Wasn't Jim Cramer defending the stock at $63 just last week?

In the postapocalyptic aftermath, there's a rush to make sense of it all. There's also an outcome vacuum that creditors and shareholders are vying to fill. On top of the employees who are up in arms that management sold out at a 93% discount to the already pulverized stock price, Joseph Lewis, Bear's second-biggest shareholder, reportedly called the $2 offer "derisory."

That heel digging was egged on by positive earnings reports on Mar. 18 from both Goldman Sachs (GS) and Lehman Brothers (LEH), whose shares, respectively, skyrocketed 16% and 46%, and helped propel the Dow Jones industrial average up 420 points. "It's causing shareholders to wonder if things at Bear Stearns weren't that bad," says Matthew Albrecht, an equity analyst with Standard & Poor's. "So there is buying in the hope that the deal falls through and a higher bid emerges."

"There are people who want to hold and believe—hope springs eternal," adds Oppenheimer (OPY) chief market technician Carter Worth. "Oh, and there's also that building." Nevertheless, he thinks it's a done deal that Bear goes out at $2. On Mar. 18, Bear saw volume of 166.7 million shares, matching the panicky total it clocked on Monday, when the market first had the chance to move on the bombshell bid.

Holding Out for a Better Deal

But if there's any one lesson in the Bear drama, it's that the debt side of its ledger is far more make-or-break to the firm than its equity particulars. At this point, it's not so much a matter of the bank's earnings fundamentals and momentum as it is how much might be left for shareholders after all of Bear's offsetting liabilities are taken into account—which itself is no easy feat. Even so, some Street wags were mumbling Mar. 18 that Bear shareholders conceivably could pocket more than $2 a share if Bear were allowed to enter into an orderly bankruptcy (of course, "orderly" is the mother of all assumptions in this credit market).

Put it all together and there's a sudden desire to horde Bear shares to accumulate votes ahead of a shareholder referendum on the deal—especially as employees already control a third of the shares. A majority dissent couldn't be so hard to amass, right?

Of course, that would be inimical to the interests of Bear's creditors. As Bear's rallying bonds and credit default swaps have been manifesting, bondholders will be made whole, or closer to it, once JPMorgan Chase (JPM) assumes Bear's balance sheet. That would not have been possible absent the Federal Reserve's unprecedented $30 billion "backstop" intervention to grease the skids to a preemptive buyout. "It was tailor-made for JPMorgan," says S&P's Albrecht. "The board has already accepted it, and it is not at all certain that any other buyer could replicate the arrangement."

So, then, it's no surprise that creditors and hedge funds who are banking on Bear's creditworthiness are, too, racing to snap up shares (translated: votes). "Bondholders," says research firm GimmeCredit, "are wary of anything that may upset the apple cart."

Capital-structure civil war marks the final battle for the soul of Bear Stearns. Exciting drama, as far as business news goes. At least for now, though, two bucks isn't enough to get you in the door to this flick.

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