Tuesday, April 08, 2008
When you're holding a hammer...
The Bear Stearns Conundrum - Investment Advisor Magazine
In fact, the real driver of Bear’s stock price was bond buyers. Having purchased debentures at 60 cents on the dollar, news of the JPMorgan deal drove bond prices near par on the 24th. The way bond buyers gamed it, if the Morgan deal somehow went bust, Bear would almost certainly go to a higher bidder. In that case, what is good for the shareholders is bad for the bondholders, as a busted deal would all but eliminate the profits the latter group were sitting on. As a result, bondholders had no choice but to buy Bear stock to diversify their risks.
Sound familiar? A well-balanced portfolio can provide significant shelter from equity market volatility. In the first quarter of 2008, for example, the worst days for stocks ended with significant gains for bonds, and vice versa. Such non-correlation enables investors to weather financial storms, which ensures their participation during good periods for financial assets.
IThe fact that bondholders and equity holders of BSC were set at odds in the
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