Monday, March 17, 2008

What can $2 buy?

What can $2 buy? Answer is troubled banks such as Bear Sterns.

This is amazing and should be a great study for students for finance. If you look at the balance sheet of Bear Sterns. JP Morgan which acquired them paid only for cash or close it. So what happened to other assets. With little knowledge of finance and banks that I have, I think most of the other assets are loans. With sub prime mess, all those loans are worth nothing. Thus effectively taking them away from firm's value. Loans and receivables are only as good as your ability to recollect them.

Normally, when a company acquires another company, they pay more than the book value as a premium. In this case, price is less than book value. This is the case of negative goodwill (goodwill as in finance).

How many more banks will follow the suit? All excesses have to come to an end. Correct? We saw dot com bubble. Now real estate bubble. History repeats.


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