BLOG VIEW: Bear Stearns’ Pacific Overtures

Written by Phil Hall
on October 22, 2007 No Comments
Categories : Blog View

If you are currently in Beijing, you may hear a strange whirring sound coming from the vicinity of Tiananmen Square. Don't worry – it's only Mao Zedong spinning in his tomb.

And why is Mao in rotation? The Chinese Communist leader once famously compared American imperialism to a paper tiger. Today, the Chinese government paid $1 billion for a stake in an ailing paper tiger.

Citic Securities, an investment bank owned by the Chinese government, is going to invest $1 billion in the ailing Bear Stearns and will receive securities that (if all goes well) will convert into an approximately 6% equity stake in Bear Stearns. Citic can also purchase up to 3.9% of Bear Stearns in the public market, giving it nearly 10% of the company's stock.

For its part, Bear Stearns is buying $1 billion of Citic debt and will eventually wind up with a 2% stake in the Chinese firm. It also has options to purchase up to 5% of Citic over the next five years.

It's not exactly an equal partnership, but at this stage Bear Stearns cannot be picky. But is this new deal a genuine shot in the arm for Bear Stearns?

It is clearly an uneven partnership at the ground level, and part of the deal involves a new joint venture designed to bolster the Chinese and Hong Kong capital markets. It is impossible to imagine that the Citic leadership will allow the Bear Stearns team to have their hands on the steering wheel for anything relating to doing business in China.

"This groundbreaking alliance will give Bear Stearns a unique footprint in one of the world's fastest-growing economies," said James Cayne, the Bear Stearns CEO, in a press statement. "Combining our operations in Asia with Citic Securities will greatly benefit Bear Stearns's global client base and generate substantial new revenues."

The emphasis for Bear Stearns, of course, is on the "substantial new revenues." The subprime debacle left Bear Stearns with substantial pain, and the company seems to believe its road to recovery begins on the far side of the Pacific. Indeed, the Citic officers needed to tiptoe around the wreckage of Bear Stearns' hedge funds and mortgage business to sign the contracts.

Clearly, Bear Stearns wants to get over the mortgage market's crisis by getting away from the mortgage market. The company isn't offering any strategy on righting what went horribly wrong for its mortgage operations.

However, it is easy to understand why Cayne and his board are smitten with China – after all, no one among that country's billion-plus population has a subprime mortgage!

Phil Hall, Secondary Marketing Executive

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