Warren Buffet is to buy 20% of Bear?

[Yan He]

BSC went up from $117 to $128 when the news came out 10 mins ago...
Wonder if any Risk Arb pick it up and the probability of completion.

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Bear Stearns, its shares and reputation beaten down after the collapse of two hedge funds, is in serious talks with several outside investors, including Warren E. Buffett, about selling as much as 20 percent of the firm, people briefed on the discussions told The New York Times Wednesday.
Other investors who have expressed an interest in buying a minority stake include the Bank of America, Wachovia and two Chinese institutions — the Citic Group and China Construction Bank, these people said.
Such an expression of interest will help bolster Bear and its chief executive, James E. Cayne, who has struggled to restore the firm's reputation. Last week, Bear reported a 61 percent decline in third quarter profit, the result of a disastrous quarter in which its mortgage trading business suffered a blow because of this summer's tighter credit market.
As always in discussions surrounding any sale of the bank, price is the main issue and these talks, like others, could founder. Mr. Cayne has traditionally demanded so steep a premium from outside investors, sometimes as high as 40 percent above the share price, that a deal has been difficult to consummate.
A spokeswoman for Bear Stearns said the firm did not comment on market rumors. Bank of America and Wachovia also declined to comment. Mr. Buffet could not be reached for comment.
But, the steep decline in the firm's share price and its relative value — it trades a little bit above its book value — has stoked renewed interest as an investment. Mr. Buffet, in particular, reached out to Mr. Cayne about a month ago, the people briefed said, when the stock was approaching its one-year low of $100.
Earlier this month, Joseph Lewis, a currency trader based in the Bahamas and a bridge-playing friend of Mr. Cayne's, disclosed that he had accumulated a 7 percent stake in the company.
As usual, Mr. Cayne is keeping his cards close, and there is no sign yet which of the investors will end up cementing a deal.
Bear's shares jumped today as news of a possible sale leaked into the market, with the stock trading up over 3 percent.

 

[Andy Nguyen]

Another follow up story I read yesterday

Bear Stearns May Draw Investment From Banks, Buffett (Update4)
By Christine Harper and Bradley Keoun
Sept. 27 (Bloomberg) -- Bear Stearns Cos. may be close to selling a stake to Warren Buffett or a financial institution as the beleaguered securities firm struggles to revive earnings and its stock price.
Buffett, the 77-year-old billionaire chairman of Berkshire Hathaway Inc., contacted Bear Stearns Chief Executive Officer James ``Jimmy'' Cayne a month ago, the New York Times reported yesterday, citing unidentified people. Other potential investors are Bank of America Corp., Wachovia Corp., and China-based Citic Group and China Construction Bank Corp., the Times said. Bear Stearns fell $1.85 to $121.15 at 4:17 p.m. on the New York Stock Exchange, after gaining 7.7 percent yesterday.
The talks may signal that Bear Stearns, the fifth-biggest U.S. securities firm, needs cash after mortgage-related losses led to its biggest drop in quarterly earnings in more than a decade. By partnering with a larger U.S. or Chinese bank, New York-based Bear Stearns could become more competitive in international markets, where it trails rivals including Goldman Sachs Group Inc. and Morgan Stanley.
An investment by Buffett could be ``great'' because it ``puts his reputation behind Bear and strengthens it,'' said Erin Archer, an analyst at Thrivent Financial for Lutherans in Minneapolis, which manages $75 billion and holds Bear Stearns shares. ``It could bolster the balance sheet and perception'' of the firm.
No Comment
Officials at Bear Stearns, Berkshire Hathaway, Bank of America and Wachovia declined to comment. An official at Citic couldn't be immediately reached.
Yu Baoyue, a Beijing-based spokesman at China Construction Bank, said ``nothing has changed'' since Chairman Guo Shuqing's comments on Aug. 27 in response to a question about buying a stake in Bear Stearns.
``For overseas acquisitions, we will focus on commercial banking for now and normally won't consider buying stakes in the big investment banks,'' Guo said then.
Speculation that Bear Stearns may sell a stake has persisted for more than a month. Richard Bove, a Punk Ziegel & Co. analyst in Lutz, Florida, said Aug. 16 that Cayne, 73, might sell as much as 20 percent of the firm to an investor such as a Chinese bank.
China Construction Bank is the nation's second-largest bank by assets. Its shares rose 32 percent on Sept. 25, their first day of trading in Shanghai. Citic Group's Citic Securities Co. is the world's fastest-growing brokerage, with a market capitalization of about $40.7 billion, more than Bear Stearns and Lehman Brothers.

Buffett's Interest
Billionaire Joseph Lewis, the British-born, Bahamas-based currency trader, paid $860 million for a 7 percent stake in Bear Stearns before the company reported a 61 percent decline in third-quarter earnings. Bear Stearns shares fell to a two-year low of $103.15 on Aug. 15, and closed up $8.76 at $123 in New York Stock Exchange composite trading yesterday.
Buffett contacted Cayne last month when the stock approached $100, the Times reported, adding that Bear Stearns executives are no longer insisting that a buyer pay a 40 percent premium for a stake in the company. Buffett bought 12 percent of New York-based Salomon Brothers in 1987 to protect the securities firm against a takeover by corporate raider Ronald O. Perelman. Salomon was sold in 1997 to what is now Citigroup Inc., the biggest U.S. bank.
``It's a good thing any time Warren Buffett buys a piece of a company or is thinking of it,'' said Joseph Saluzzi, co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. ``You can't go wrong with a guy like that behind you.''

Swaps Decline
Credit-default swaps on Bear Stearns fell 15 basis points yesterday to 75 basis points, according to Phoenix Partners Group in New York, signaling an improving perception of credit quality. The five-year contracts dropped to 70 basis points earlier in the day, the lowest in two months. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Bear Stearns's stock has declined more than 15 percent since mid-June when two of the firm's hedge funds failed because of bets on mortgage-linked securities, damaging Cayne's reputation for avoiding risk.
Third-quarter earnings fell short of analysts' estimates after fixed-income sales and trading slumped 88 percent amid ``extremely challenging'' market conditions. The collapse of the hedge funds saddled the firm with $200 million of losses. Chief Financial Officer Samuel Molinaro said Sept. 20 that ``the worst is definitely behind us.''
To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net ; Bradley Keoun in New York at bkeoun@bloomberg.net .

 

[Andy Nguyen]

Swaps Decline
Credit-default swaps on Bear Stearns fell 15 basis points yesterday to 75 basis points, according to Phoenix Partners Group in New York, signaling an improving perception of credit quality. The five-year contracts dropped to 70 basis points earlier in the day, the lowest in two months. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Here is a picture that helps me visually understand the above quote. You can see there is a huge jump in CDS protection of Bears around June 07. The data is from 5 year CDS contract. It goes from 30-40 range to 180 when the 2 hedge funds blows up. It's going down recently, especially with the good news about Buffett buying it.

 

[Yuriy]

Andy, do you know how "big" are Bank of America and Wachovia? I had never heard of Wachovia until I came to Florida and was under the impression that is is more like a local bank. Is it in their power to buy a part of Bear?

 

[SteveTownsend]

Coincidence

The rumor here helped Bear to sell $1bn of bonds the next day. How convenient.

 

[Hien]

Andy, do you know how "big" are Bank of America and Wachovia? I had never heard of Wachovia until I came to Florida and was under the impression that is is more like a local bank. Is it in their power to buy a part of Bear?

I'm not sure how big Wachovia is...but I've seen their branches in NY. So definitely they're not just in Florida.

 

[Chris]

Andy, do you know how "big" are Bank of America and Wachovia? I had never heard of Wachovia until I came to Florida and was under the impression that is is more like a local bank. Is it in their power to buy a part of Bear?

According to wikipedia, [wikipedia]Wachovia[/wikipedia] is one of the largest banking chains in the US in 21 states and has over 40 global offices throughout the world so definitely not your local bank.

 

[SteveTownsend]

According to wikipedia, [wikipedia]Wachovia[/wikipedia] is one of the largest banking chains in the US in 21 states and has over 40 global offices throughout the world so definitely not your local bank.

I interviewed at Wachovia Securities in early 2006 for a position working on an equity derivatives trading system. Their investment bank used to be Prudential Securities and at the time I was there I was told they are investing heavily to be taken seriously in the IB world. New premises on Park Ave north of GCT are very swish and also support that impression. I was tempted but took the Credit Suisse position instead.

 

[Andy Nguyen]

Steve,
A bit off topic here but what is the difference between the equity derivative trading position you interviewed at Wachovia and the one you doing now ?
Is the Park Ave office at 250 Park ?

 

[Yuriy]

I'm not sure how big Wachovia is...but I've seen their branches in NY. So definitely they're not just in Florida.

Yes, they do have branches in NY, but only a few ones. I was looking for one after I had left Florida and found just one or two branches in Manhattan. On the other hand, there are many Citibank, Chase, Washington Mutual and other banks around. So I was not sure how strong they are in terms of "national importance".

 

[Yuriy]

I was browsing jobs at Wachovia the other day, and found that most of their jobs are in Charlotte, NC.

What do you think about Charlotte? At one time, I was told that there are many banks in Charlotte, and it is a sort of financial city like NYC but smaller.