The barely above nothing per share price JP Morgan Chase agreed to pay to acquire Bear Stearns has many questioning whether Bear Stearns owns its headquarters at 383 Madison avenue. The soaring skyscraper on prime midtown real estate occupies about 1.1 million square feet on 45 floors. It was selected in 2001 as one of the best new skyscrapers by an industry group. It cost upward of $280 million to build and, despite recent pressure in global real-estate markets, is presumably still worth more than the $236 million price tag JP Morgan agreed to pay.
This has led some, including an analyst on the conference call hosted by JP Morgan last night, to ask whether or not Bear Stearns owns this building. The answer is a bit complicated. In its 10K for 2007, Bear said it had entered into a "synthetic lease" arrangement for 383 Madison Avenue, under which it is obliged to make lease payments based on the lessors underlying interest costs. Companies put synthetic leases in place for accounting and tax reasons. They are meant to allow a company to achieve the tax benefits of ownership without the accounting burdens of ownership. Companies are allowed to treat payments made under synthetic leases as operating costs, which reduce corporate taxes they pay. The terms of the lease typically allow them to also achieve the tax savings of ownership through reduced payments
But because Bear Stearns retains an option to repurchase at the end of the term of the lease, for practical purposes it retains many of the benefits of ownership. It stands to eventually capture the appreciation in the value of the building. So although the building is considered "off balance sheet" for accounting purposes, Bear likely retains much of what is considered "owernship" of the building. In 2007, Bear Stearns said the maximum residual value of the option to purchase was approximately $570 million.
Effectively, this means that Bear Stearns was sold JP Morgan Chase for less than the value of its real estate assets. This negative valuation, in turn, suggests JP Morgan is accepting huge liabilities from Bear.
Update: Choire Sicha points out that the Federal Reserve claims the building is worth $1.2 billion. He thinks that's a low-ball estimate. "And it's gotta be worth more. The MetLife building sold for $1.72 billion in 2005; 666 Fifth Avenue was bought (for better or for worse!) at the end of 2006 for $1.8 billion," he says.
Posted by guest , Mar 17, 2008 8:53AM
bear Stearns may own the building but they definitely do not own the land. They have a 99 year lease on the land from a saudi arabian family.
Posted by AJ , Mar 17, 2008 8:54AM
Is the lease agreement an exhibit to the 10k that they filed at some point?
Posted by John Carney , Mar 17, 2008 8:56AM
We scanned quickly for it but didn't find it. If anyone finds the lease agreement, please let us know. We've only read summaries.
Posted by guest , Mar 17, 2008 9:04AM
http://lolfed.com/wp-content/failboat.jpg
Posted by Anal_yst , Mar 17, 2008 9:13AM
Just skimming the papers this morning, and I'm appalled (albeit unsurprised) at the coverage. As I have pointed out previously, the Media have done an abhorrent job of reporting the realities of the issues facing the financial world the past year or so, and Today is no exception. The WSJ itself, front page "JPM Rescues Bear", is bordering on Gretchen Morgenson-esque irresponsible journalism in their choice of verbage. While those of us with the knowledge and background to discern such things may be able to parce through (or actually read the articles instead of just the headlines), the masses will see only signs of doom and largesse by Wall Street Fat Cats.
This is dissapointing, and is not helping things whatsoever, butt unfortunately, I don't see Media outlets assuming a responsible stance (i.e. recognizing their ability to affect the situation at hand) any time soon, argh...
Posted by guest , Mar 17, 2008 9:18AM
Nice to see that Cayne actually left a bridge tournament on Saturday. Hey asshole; maybe, just maybe, is you hadn't been playing bridge and golf and instead had been paying attention to your company it woulnd't be in the toilet righ tnow. Way to ruin an 85 year old compnmay in a few months. Now you can go play bridge all of the time.
Posted by guest , Mar 17, 2008 9:27AM
9:13 - "Verbage" is not a word, and even if it were, it wouldn't mean what you think it does.
Otherwise, you are dead-on.
Posted by golden girl , Mar 17, 2008 9:33AM
Good point about the lease arrangement. Does BSC have any additional buildings internationally or in other US cities?
Posted by Master of None , Mar 17, 2008 9:36AM
Apparently they just finished a new building on Canary Wharf, but do not own the land.
Posted by Investorcluzo , Mar 17, 2008 9:48AM
I thought we agreed we were done talking about this subject? more importantly, jpm is up a buck fifty. purchase price just jumped to $2.08...
Posted by golden girl , Mar 17, 2008 9:55AM
PS: I liked the suggestion in the other thread about a happy hour at Black Bear Lodge. They have Jaeger on tap there!
Posted by guest , Mar 17, 2008 10:15AM
buckets of PBR are the best.
I never would have thought people would be discussing PP&E with respect to valuation of f'n Bear Stearns.
I jumped out of my ultrashort ETFs and the market is battling back, going to be yet another great buy opportunity this afternoon.
Posted by guest , Mar 17, 2008 10:15AM
Anyone know what's going on at Bear today? Why even bother to come into work if you're anyone not working in prime brokerage or clearing?
Posted by Investorcluzo , Mar 17, 2008 10:17AM
@ golden girl: given that it's st. paddy's day, I believe the festivities should start a little earlier tonight. make it happen carney!
btw, did you see the pictures of the bear employees leaving with pitch books, ect? I'm sure they didn't want the cameras catching that action.
Posted by guest , Mar 17, 2008 10:19AM
BSAM is in my building on the 7th and 8th floor...no one on my elevator got off there.
Posted by guest , Mar 17, 2008 10:27AM
Bear still trading in the ~$3.70 range, so obviously people don't think this deal is getting done as announced.
Posted by Anal_yst , Mar 17, 2008 10:32AM
Whoohoo that Individual Investor from the call should be jumping for joy, his shares are worth 15%+ more than the announced price now, yay!!!!
Posted by guest , Mar 17, 2008 10:34AM
It's "Choire", for cryin' out loud.
Posted by John Carney , Mar 17, 2008 10:40AM
Oh, dammit. You know damn well that our copy editor is always drunk, and that today is faux-St. Paddy's day and so he's been drunk all weekend.
Posted by guest , Mar 17, 2008 10:44AM
So where the fuck is BSC management? They agree to sell the company and all they do is cancel the earnings call and toke up?
Posted by Anal_yst , Mar 17, 2008 10:54AM
10:50 03/17 *DJ JPMorgan Can Buy Bear Building If Deal Voted Down -CNBC
(insofar as we can trust Gasbag/CNBC, of course...)
Posted by guest , Mar 17, 2008 10:55AM
@Investorcluzo: where are those picture located?
Posted by guest , Mar 17, 2008 11:14AM
@Inspectorcluzo: where are these picture you speak of?
Posted by BruceWayne , Mar 17, 2008 11:30AM
@10:19am
You wouldn't happen to be at 290 Park would you? My friend called me and said that less than a 1/3rd of the people showed up today.
Posted by guest , Mar 17, 2008 11:30AM
Nobody seems to have mentioned it, but even if Bear owns the building, it's pretty clear that the negative valuations of the securities they own (securities being a charitable description) far outweigh the value of their assets.
Posted by Master of None , Mar 17, 2008 11:33AM
@10:27
JPM trading +10%, so obviously people do think this deal is getting done as announced.
Er, what? Information asymmetry! Inefficient markets!
At first I thought BSC was being propped up by short-covering, but 2 hours after market open, I guess that's not the case.
Anyone have ideas to explain the disconnect?
Posted by guest , Mar 17, 2008 11:47AM
I don't understand why people from BSC, as reported, are just not showing up today. How does that make sense from a personal standpoint?
Posted by guest , Mar 17, 2008 11:55AM
Anyone have any comment on what is going on inside LEH?
Posted by golden girl , Mar 17, 2008 11:57AM
@Master of None: Isn't it because the deal is technically structured as a percentage of JPM shares? (Something like 5% of a JPM share per BSC share?)
If so, that would explain some of the mis-alignment as JPM shares are up 10% today - but it doesn't cover the full discrepancy, so not sure what other factors are contributing.
Posted by Investorcluzo , Mar 17, 2008 11:57AM
@10:55/11:15: it was a clip on cnbc. the was a blonde woman with a beach bag (clearly a closing dinner parting gift) and a wheely (sp?) (yes, a wheely) leaving the building getting into a black car. I have a feeling those car vouchers are in short supply right about now. anyone from bear care to get us a few cars to a.c. tonight? just askin'...
Posted by BruceWayne , Mar 17, 2008 12:14PM
Is anyone else having trouble getting through to Bear's HR?
Posted by guest , Mar 17, 2008 12:37PM
Where has Ace Greenberg been through all of this (he is still on the board). Did they sedate him and attach him to life support?
Posted by guest , Mar 17, 2008 12:53PM
A synthetic lease, or tax retention operating lease, is a financing vehicle... lease for accounting purposes, debt for tax purposes. In short, the property is encumbered by a significant amount of debt.
Posted by golden girl , Mar 17, 2008 12:59PM
@12:37: Michelle Caruso Cabrera called him and asked if he thought that BSC would still be fine if the Fed had acted sooner. She said he replied "If you wonder what if you'll make yourself go crazy" and then refused to speak further, referring her to the PR department.
Posted by guest , Mar 17, 2008 2:38PM
Just curious: how did guest@9:18 know the Cayne left his bridge tournament Saturday? I had concluded that the man was a complete psycho.
Posted by guest , Mar 17, 2008 5:09PM
Does this mean the new Corp. will be called Bear Chase ?
Posted by guest , Mar 17, 2008 5:19PM
To guest 5:09PM. No, the new Corp. will be called Chased Bear. or depending how the market goes, "Chastened Bear."
Posted by guest , Mar 17, 2008 10:44PM
Synthetic leases are operating leases for GAAP (off-balance sheet under FAS 13; no depreciation expense taken on income stmt) and financings for tax (lessee is the owner for tax purposes and takes tax depreciation; lessee has all of the upside and virtually all of the downside risk). The structure provides for three options at the end of the lease term:
1) refinance - basically refi @ the original financing amount (in this case, the construction cost of the building) or perhaps at the then fair market value of the asset
2) purchase - buy the property for the original financing amount
3) "elect the sale option"...let lessor (an SPE controlled by some of BSC's banks) sell the building. if bldg sells for more than the original financing amount, lessee (BSC) keeps the upside...if sells for less than original financing amount, BSC is on the hook for a residual payment equal to the shortfall (unless shortfall is greater than about 15% of the original financing amount, and then BSC would only be on the hook for the first 85% decline in value - or about $570MM - and the bank/SPE lenders would be on the hook for the last 15%).
The lessee during the lease term, always has option 1) and option 2) available to it (at least on a monthly basis when lease payments are due - in simplest terms, the lease payments are at a slight premium to BSC's corporate borrowing rate at time structure was put in place), and if JPM / BSC wanted to capture the upside in the value of the property (fair market value today vs. financing amount), they would elect option 2, and buy the building for the original financing amount, then turn around and sell it for fair market value (practically speaking, this could be accomplished via an assignment of the purchase option to a third party landlord, with the difference between the fair market value and the financing amount going to JPM/BSC, so as to avoid a double transfer of the property).
Posted by guest , Apr 04, 2008 1:02PM
Screw Bear Stearn, you can't tell me that they didn't see this coming. This is just plain GREED! Live and learn BOYS~!
Posted by guest , Apr 04, 2008 1:51PM
And to think that WE that Mr. Cayne Bear Stearn CEO made $38.3 million last year and $155.3 million over that last 5 years, this didn't effect the bonuses for 2007, the top 5 still managed to get theirs, so now let them GET THEIRS! Screw Bear Stearns!!!!!!!!!!!!!!!!!!!!!!Let em'DIE!