Company Commentary
Bear Stearns' Debacle
By Rick Rouse
Mar 25, 2008 - 7:12:59 AM

One of my favorite precursor's in option trading is the saying "Where there's smoke, there's fire".  In a stock fall that bears (no pun intended) eerie similarities as the Enron debacle, Bear Stearns (BSC, $11.25, up $5.29) rebounded big-time after having it's stock price plummet over 80% in a single trading session when JPMorgan (JPM, $46.55, up $0.58) acquired the company for $2 a share.  After a weekend of heated negotiations, JPMorgan has now agreed to pay $10 a share as angry and outraged Bear employees and shareholders rallied together in an attempt to get a higher offer.  I'm pretty sure they aren't too happy with the new "deal" either as JP Morgan purchased 95 million new shares of the company, giving it a 40% stake in Bear Stearns and likely paving the way to closing the deal by early April.    

Bear might be able to squeeze a few more dollars by then but the damage has already been done.  I have been warning you of a Bear Stearns collapse since early August when the stock was over $100 a share and as recently as January when the stock was over $80.  Talk about "ruining a company" and Bear Stearns will now top many of those lists in a who's who to blame.  Those are just incredible numbers if you take a minute to fathom how an 85-year old company virtually ruined itself overnight.     

Bear was on the brink of bankruptcy and it's certainly sad times for those who work for the company considering how many of the company's employees lost practically their whole life savings.  Imagine losing you kid's college tuition as a few executives may have after watching their company's stock fall from a high of $160 to $80 then $60?  And then, in a matter of a couple of days the stock went from a $60 close two weeks ago to $30 to $5?  Wow.  The March and April put options, or any put options on Bear Stearns for that matter, made a few people a small fortune.

I remember writing about Enron back in 2001 and thinking the same lesson should have been learned with people that have too much money tied-up into their company's stock.  But once again, because of certain Securities and Exchange laws, many employees couldn't dump their stock because an earnings announcement was due from the company.  Either way, like I have been writing about, some of these executives at Bear had to know how much trouble the company was in.  For Pete's sake, they work for the company so they should know how bad things really are/ were shouldn't they?  As a hedge position against this sort of thing, if employees would have bought put options they could have made the same fortune as you or I could have made on the collapse of the company. 

As an option trade, this story is far from over and one that will garner many headlines in the days and weeks ahead.  Like I said, the easy money has already been made and it's just not worth it - looking for an option trade on Bear right now.  Yes, money could have been made on the call options after Monday's big rebound in Bear's stock price but it would have been impossible to predict the rebound and by how much. 

Hit me up if you enjoyed the article or made any money!