This Tech Bubble Is Different

good slide show

http://www.businessinsider.com/is-there-a-new-tech-bubble-2011-4#-1

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Top 10 Signs Tech Is A Massive Bubble Again

Read more: http://www.businessinsider.com/kedrosky-tech-bubble-2011-3#ixzz1TLIeQi39

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Anti- Bubble

Thiel: Tech Bubble? What Tech Bubble?

http://bits.blogs.nytimes.com/2011/06/07/thiel-tech-bubble-what-tech-bubble/

“The first component of a bubble — something a lot of people believe and can act on — doesn’t even exist,” Mr. Thiel said. “Most of these companies are privately held. There is no way for the public to become involved.”

The doomsayers are simply hungover from the last bubble’s burst, he said. “People are still burned out from the ’90s.”

Much of the bubble talk surrounds five companies: Groupon, LinkedIn, Zynga, Facebook and Twitter. Mr. Thiel estimates that those five companies account for three-quarters of the value of new Web companies and, he said, five companies do not make a bubble. If they did, we have bigger problems, he said.

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This Tech Bubble Is Different

http://www.businessweek.com/magazine/content/11_17/b4225060960537_page_2.htm

This was in April 2006, and Mark Zuckerberg gave Hammerbacher—one of Facebook's first 100 employees—the lofty title of research scientist and put him to work analyzing how people used the social networking service. Specifically, he was given the assignment of uncovering why Facebook took off at some universities and flopped at others. The company also wanted to track differences in behavior between high-school-age kids and older, drunker college students. "I was there to answer these high-level questions, and they really didn't have any tools to do that yet," he says.

asr: Zuck doing smart job , with 100 th employee

"We are certainly in another bubble," says Matthew Cowan, co-founder of the tech investment firm Bridgescale Partners. "And it's being driven by social media and consumer-oriented applications."

The dot-com boom was built on infatuation with anything Web-related. Then the correction began in early 2000, eventually vaporizing about $6 trillion in shareholder value. But that cycle, too, left behind an Internet infrastructure that has come to benefit businesses and consumers.

"Any generation of smart people will be drawn to where the money is, and right now it's the ad generation," says Steve Perlman, a Silicon Valley entrepreneur who once sold WebTV to Microsoft for $425 million and is now running OnLive, an online video game service. "There is a goodness to it in that people are building on the underpinnings laid by other people."

The most coveted employee in Silicon Valley today is not a software engineer. It is a mathematician," says Kelman, the Redfin CEO. "The mathematicians are trying to tickle your fancy long enough to see one more ad."

"Facebook is not the kind of technology that will stop us from having dropped cell phone calls, and neither is Groupon or any of these advertising things," he says. "We need them. O.K., great. But they are building on top of old technology, and at some point you exhaust the fuel of the underpinnings."

And if that fuel of innovation is exhausted? "My fear is that Silicon Valley has become more like Hollywood," says Glenn Kelman, chief executive officer of online real estate brokerage Redfin, who has been a software executive for 20 years. "An entertainment-oriented, hit-driven business that doesn't fundamentally increase American competitiveness."

"It's a safe bet that sometime in the next 20 months, the capital markets will close, the music will stop, and the world will look bleak again," says Bridgescale Partners' Cowan. "The legitimate concern here is that we are not diversifying, so that we have roots to fall back on when we enter a different part of the cycle."

BP credit-default swaps widen to junk territory

http://www.marketwatch.com/story/bp-credit-default-swaps-widen-to-junk-territory-2010-06-10

(BP 33.00, +0.22, +0.67%) credit-default swaps ballooned on Thursday to junk level status, despite the oil giant being rated AA by rating agencies. According to data from Markit, BP swaps widened to 570 basis points, up 195 points from Wednesday. That means it costs $570,000 per year to insure $10 million of BP debt for 5 years.

asr: so $10 mil $500k that is 5% it costs to insure DEBT per year that is junk status .

- it means if any existing BP Lender ( who lended money already to BP ) can buy insurance of this 5% so they get paid full from insurarer in case of if BP defaults

2010-Jan

see this drop in Jan to NOV level ..

Do Option Sellers Have a Trading Edge

According to a breakdown by the Chicago Mercantile Exchange Clearing House, more than 85% of all S&P options sold during the last three years expired out of the money and worthless.*
*Source: Chicago Mercantile Exchange Clearing House; Analysis of S&P options sold during the period 2004 through 2007.
asr: note this is recent report that is 2004 to 2007


How does the Time Means Money program use Probability Theory?
A: The Time Means Money program utilizes the fact that options sold near 2 standard deviations from the mean of the market will most likely expire worthless, allowing premium collectors to make money.
:: What is Probability Theory? ::
Probability theory is the branch of mathematics concerned with the analysis of random phenomena. The roll of a die, for example, is a random event. If repeated many times, the sequence of random events will exhibit certain statistical patterns, which can be studied and predicted...


The Time Means Money program first identifies trades that have a potentially high statistical probability of success. We then design suitable credit spreads that will limit risk while allowing for potentially maximum profits to be taken. Throughout the life of the trades, entry and exit points are determined, monitored, and with your approval, executed for you. While we do the work, all trade recommendations generated by this program are ultimately yours to take or ignore.


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ASR: the chosen period 1997-1999 is bull market , so even 75% CALL options expired ( PUTS 82% ) options sellers have edge as they are professionals.


Based on data obtained from the CME, I analyzed five major CME option markets - the S&P 500, eurodollars, Japanese yen, live cattle and Nasdaq 100 - and discovered that three out of every four options expired worthless. In fact, of put options alone, 82.6% expired worthless for these five markets.

This study analyzes data compiled by the Chicago Mercantile Exchange (CME) for a special options report prepared for this my book, Options on Futures: New Trading Strategies (Wiley & Sons), co-authored by Jonathan Lubow, vice-president of Trader's Edge, Inc., a futures and options brokerage based in Madison, NJ.

Three key patterns emerge from this study: (1) on average, three out of every four options held to expiration end up worthless; (2) the share of puts and calls that expired worthless is influenced by the primary trend of the underlying; and (3) option sellers still come out ahead even when the seller is going against the trend.

CME Data
Based on a CME study of expiring and exercised options covering a period of three years (1997, 1998 and 1999), an average of 76.5% of all options held to expiration at the Chicago Mercantile Exchange expired worthless (out of the money). This average remained consistent for the three-year period: 76.3%, 75.8% and 77.5% respectively, as shown in figure 1. From this general level, therefore, we can conclude that for every option exercised in the money at expiration, there were three options contracts that expired out of the money and thus worthless, meaning option sellers had better odds than option buyers for positions held until expiration.


This bias in favor of put sellers can be attributed to the strong bullish bias of the stock indexes during this period, despite some sharp but short-lived market declines. Data for 2001-2003, however, may show a shift toward more calls expiring worthless, reflecting the change to a primary bear market trend since early 2000

2000 to 2002 bear market drawdown 44.12%

when looking at the current drawdown period -- the decline in value of the Dow Jones Wilshire 5000 from its peak to its trough -- the most recent drop is about 41.5%. That's less than the 44.12% drawdown experienced during the 2000 to 2002 bear market, said Krein.

While only time will tell whether the bottom has been hit, a 40%-plus decline is significant, to the degree historical trends hold, said Krein.
Timing is everything
"If we happen to be at the bottom now, maybe history will hold and maybe it won't, but it still takes a multiple of the period of decline to recovery. It's that buildup that investors do not want to miss," said Krein.

Time to jump in?
Housing prices are down, and mortgage rates remain low, but potential buyers should be cognizant of being in it for the long haul, as MarketWatch's Amy Hoak reports.

The market took about three and a half years to recover after the 2002 bear market, yet the market rebounded 14.86% in the year following the trough date.
"If you expand this out to two or three years, the market has rebounded 28.28% and 48.29%, respectively," Krein said.

Historically, the recovery takes about twice as long as the decline. But for those "with the stomach and capital to wade back in," investing at market lows in the past has translated into gains of 40% and more for those who buy and then wait out the bounce back, Krein said.

"If you're a long-term investor, I think stepping in even at this point in time would be a good move. Economies don't stay weak forever, so it makes sense to position for a turnaround that we see happening sometime next year," said Pavlik.

Market Action

CNBC reporter said on TV that Madoff ponzi schme did not hit redemptions at other hedge funds because this is too late to sell for this quarter (may be accounting/ rules etc..)
- The reporter says other hedge-fund redemptions(sell) hit market in January.
- he indicated there are "not many sellers/not many buyers" so markets are quite and volatality is low .

asr: I thought 12/15 monday oil drop from 49 to 45 is due to monday's Madoff news and subsequent hedge fund redumptions, it seems that is not the case based on above .
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cudue: OPEN cut expected Wednesdya 12/17
12/15 asian market curde is $49
12/15 US session 49 -> 45
12/16 US morning started with 45 when got early announcement of 2 mil. cut (11 am EST) , dropped to 42 and recovered to 43
12/17 opened 43.5 , actual news came as 2.2 mil cut, dropped to 40.25 , recovered to 42 then finally dropped to 40.5

World Stock Markets drops

Indexes fall hard on bloody Friday
Hang Seng ends below 13,000, Sensex under 9,000, Nikkei below 8,000 and Kospi beneath 1,000

By V. Phani Kumar, MarketWatch

Last update: 7:24 a.m. EDT Oct. 24, 2008Comments: 423HONG KONG (MarketWatch) -- Asian markets were mauled Friday, with Japanese, Indian and South Korean indexes slumping more than 9.5% each to end below crucial psychological milestones as fears of a global recession swept across the region. Benchmarks in Hong Kong, Australia, Singapore and Taiwan dropped to their lowest levels in at least three years.
Japan's Nikkei 225 Average sank 9.6% to end at 7,649.08, a closing level it hasn't seen since April 29, 2003. The benchmark is now valued at less than a fifth of its all-time high of 38,915.87, which it touched in December 1989

- Tokyo's Nikkei 225 index closed the lowest since October 1982.
- Hong Kong's Hang Seng Index tumbled , its lowest close in more than four years
-The Shanghai Composite Index lost 72 percent from its peak about a year ago.
- India same as China lost around 70%


Indian Stock Market data:
asr: Index Bombay sensex BSE lost 60% in 9 months.



The price to earnings ratio P/E, a measure used to value a company's shares in relation to its profits, for the 30 stocks on the benchmark has dropped to 8.83 from 31.16 in January, when the index hit a record, according to data compiled by Bloomberg.

The centuries-old tradition of seeking blessings at Diwali has taken on added impetus this year after the destruction of $1.3 trillion in investor wealth, more than India's annual economic output

The Sensex's plunge this year, after doubling in the past two years, has made stocks in Asia's third-largest economy cheaper, 27-year-old Hardik Chheda said in Mumbai.




While the Sensex, which tanked to a low of 8566.82 in afternoon trade, ended with a massive loss of 1070.63 points or 10.96% at 8701.07,
In Jan/2008 BSE sensex was 21,000
asr: so it lost 60% in 9 months , wow losing 60% in one year , that happens only in developing countries , in US/Europe it seems max loss may be 40% so far...

Confessions of a Short Seller

Kass, 58, is founder and president of Seabreeze Partners Management in Palm Beach, Fla., a hedge-fund firm overseeing about $200 million in short positions. A veteran investor with a research background, he headed institutional equities at First Albany and later, JW Charles/CSG, in the early to mid-1990s.

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Doug runs a short only fund, Seabreeze Partners. He discusses a few key datapoints from the interview:

• As of April 30, flagship Seabreeze Partners Short fund was up 16.5% (vs 5.6% loss for the SPX)

• Since inception (January 2005) the fund is up 40.7%, versus a 15% gain for the S&P

• The amount of trading dollars that are in dedicated short pools are tiny: About $5.4 billion (Knowledge@Wharton). That's one-seventh the size of Fidelity's Magellan Fund.

• The $5.4B dedicated short hedge funds are a sliver of the nearly $2 trillion of hedge-fund assets.

• Over the past two decades, 58% of the issues on the New York Stock Exchange have advanced, while 42% have declined -- every year.

10 Bullish Charts, Signals, Indicators

Earlier this week, we discussed several anecdotal piece of evidence that suggested we were closer to the bottom then the top.

Today, we look at specific data and charts that can provide some insight as to how extreme these present levels are.

These suggest to us that we are increasingly close to a bottom that can be purchased for an upside trade of 20-30% from these levels. (We scale in over time, in 10% increments).

Russia, Indonesia Shut Exchanges as Rout Worsens; Brazil Drops

- Russia's Micex Index has lost 66 percent of its value this year, - compared with a 62 percent drop for China's CSI 300 Index and
- a 44 percent decline on India's Sensex.

The Russian exchange won't reopen until Oct. 10 unless the Federal Financial Markets Service says otherwise, Micex spokesman Alexei Gerasyuk said.

Asian markets crumble, Nikkei 225 dives 9.4%

Asian markets crumble, Nikkei 225 dives 9.4%
Hang Seng loses 8.2%, S&P/ASX 200 off 5%, Indonesia index slumps 10.4%
By V. Phani Kumar, MarketWatch

Last update: 6:01 a.m. EDT Oct. 8, 2008Comments: 394HONG KONG (MarketWatch) -- Asian markets crumbled Wednesday, as investors alarmed by a deteriorating financial markets situation dumped blue-chip stocks to raise cash, sending several indexes tumbling down to multi-year lows.

"It's not just the hedge-funds, everybody is selling ... And there are no buyers," said Dale Tsang, managing director at Imperial Dragon Asset Management Co. in Hong Kong. "There is a state of panic, for cash. Everybody needs cash."
"No, I haven't seen anything like this, and I don't think anybody has seen anything like this before, except those who are over 75 years old and have seen the Great Depression," Tsang added.


Japan's Nikkei 225 Average tumbled the most to close 952.5 points, or 9.4%, lower at 9,203.32 for its worst single-day percentage drop in years. The broader Topix index lost 8% to 899.01. Both benchmarks declined for a fifth straight session.
Toyota (TM:toyota motor corp sp adr rep2com
News, chart, profile, more
TM 65.11, -3.43, -5.0%) (JP:7203: news, chart, profile) stock lost 11.6% as shares of exporters were assaulted in the wake of a strengthened yen. The stock was also hurt by a Nikkei business daily report that the company's operating profit in the current financial year ending March 31 is expected to tumble 40% to about 1.3 trillion yen ($12.6 billion) as a deepening financial market turmoil hurts demand for automobiles.

NTDOY 40.00, -0.35, -0.9%) (JP:7974: news, chart, profile) plummeting 11.1%.
Hong Kong rate cut ignored
Hong Kong's benchmark index fell below its two-year lows, shrugging off the central bank's decision to cut interest rates by a full percentage point, a move designed to encourage banks to lend more actively to each other.
"I think the basic problem here is of confidence. We don't lack in liquidity, but most banks are keeping the available funds for themselves and not lending to others. That is what is happening everywhere in the world," said Y.K. Chan, strategist at Phillip Capital Management.

The Hang Seng Index finished 8.2% lower at 15,431.73, for its biggest single-day percentage loss since January 22, and its lowest finish June 14, 2006. The Hang Seng China Enterprises Index fell 8.3% to 7,731.68. Every single constituent of both indexes ended in the red.

The decline came even after the Hong Kong Monetary Authority Wednesday said it will cut the base rate -- the interest rate at which it lends to banks through its discount window -- by one full percentage point to 2.5% from Thursday, amid "stressful conditions in global financial markets."
"Central banks are applying the right medicine to the credit markets and are in the process of breaking a vicious cycle, but it's not broken yet," said Howard Gorges, vice chairman at South China Brokerages in Hong Kong. "People are waiting for further government action on possible recapitalization of banks."
Rest of region

The losses came after a sell off on Wall Street, as investors found little respite even after the Federal Reserve announced it would buy unsecured commercial paper in an effort to restart a market that has virtually shut down in recent weeks See full story and Fed Chairman Ben Bernanke opened the door for a possible interest-rate cut soon See full story.
Phillip Capital's Chan said coordinated action by central banks around the world will likely "be the next move."

"Even the Fed has indicated it will cut rates. I think most of the global central banks will cut rates," he said. "But the overall economy can't get better until the confidence improves and banks are willing to lend again."

In Taipei, the Taiex tumbled 5.8% to 5,206.40, its lowest level since July 2003.
China's Shanghai Composite gave up 3% to 2,092.22, while Australia's S&P/ASX 200 fell 5% to 4,388.10, a day after a higher-than-expected one percentage point cut in interest rates by the country's central bank lifted the index 1.7%.

Something to celebrate, sort of Commentary: Dow Theory's Schannep turns bullish, calls end of bear market

By Peter Brimelow, MarketWatch
Last update: 2:39

37NEW YORK (MarketWatch) -- A disastrous day, so I'll start with some cheerful news: Jack Schannep has turned bullish.
The editor of TheDowTheory.com said last night in an email to subscribers:
"Today's collapse in the stock market is what we have been looking forward to all year -- the end of the bear market! ... Yes, today we reached capitulation and that is the time to buy. I suggest investing 50% into the market now, equally between SPDR S&P 500 ETF (SPY:SPDR S&P 500 ETF
Schannep has been signaling this call for some time. He has a highly individual interpretation of the Dow Theory, explained in his new book, "Dow Theory for the 21st Century." See related column. But his actions now seem to be based on his proprietary technical indicators. He writes in explanation:

"That is what I will be doing in the model portfolio in accordance with the 'rules' of the Schannep Timing Indicator and our Composite Indicator. The last time we had such a signal was on October 9th, 2002, the start of that 5 year bull market."

Schannep's record (for the record) is looking better and better. Over the year to date, TheDowTheory.com is up 1.9% by Hulbert Financial Digest count, vs. negative 18.6% for the dividend-reinvested Dow Jones Wilshire 5000 (DWC:Dow Jones Wilshire 5000 Composite Index

This makes it one of only 13 letters out of some 180 followed by HFD to be in the black this year. Over the past five years, the letter has achieved a 7.31% annualized gain, vs. 6% annualized for the total return DJ Wilshire 5000.
There.

Feel better now?
Schannep's switch emboldened me to look at Richard Russell's Dow Theory Letters. The octogenarian Russell has been ill recently and has just admitted sadly that he missed the great break that began last summer. (See Sept. 19 column). But his long-run HFD record is so strong that his views have to be respected. See related column.
Russell sees clearly how this will end:
"This is real bear market action such as we've not seen since 1973-74. I expect this downtrend to end with an all-out panic-type crash. That would clear the air and serve to reduce the huge inventory of stock for sale. When the store of 'stock for sale' is emptied out, we will be close to the time when the institutional bargain hunters are ready to re-enter the market. That action will be characterized by a 90% up-day."

But he derides the idea that Dow Theory or anything else suggest a bottom can be called at this point: "Bear declines end in only one way -- in exhaustion."
After Tuesday's close, Russell wrote: "Today's decline was dreadful and atypical action...The stock market appears to be in full panic mode." But apparently still not enough to justify calling a bottom: Russell even speculates that the market may test the 2002 low Dow low of 7,286.


Oh well. Back to the cheerful, -- sort of. Peter Eliades' Stock Market Cycles is now the HFD top performer over the year to date, up 17.8%. Eliades was up 4.3% in September alone, vs. negative 9.3% for the total-return DJW. See related column.

In the last email bulletin available at press time, sent out on Friday night, Eliades wrote:
"Orthodox technical analysis would be looking for the possibility of a market low at current levels. And yet... and yet... with the exception of [one of his proprietary indictors] there is just no indication from the Trading Index moving averages that the market is forming a bottom of any importance."
Eliades says his work suggests, tentatively, a low of 8,000-8,600 on the Dow.

Asia Investment in Wall Street firms

Citic was to buy $1 billion worth of 40-year preferred securities convertible into about 6% of Bear Stearns equity. The conversion price of Citic's investment into Bear Stearns was around $120, based on the last five days traded prices at the time. Bear Stearns had traded down from a January 2007 high of $171 leading some market commentators to observe that Citic had got itself a bargain. The arrangement was somewhat reciprocal as Bear Stearns would eventually invest $1 billion in Citic's equity, based on Citic's traded share price.

Bear Stearns' share price lost ground all of last week as investors � correctly � feared the worst and closed at $30 on Friday. Then JPMorgan bailed out the beleaguered investment bank over the weekend at a price of $236 million, which translates to a valuation of around $2 per share. Bear Stearns' shares lost 84% on the news, finishing at $4.81 on Monday but gained some ground on Tuesday to trade up to $7 before closing around $6.

Citic said yesterday it will not be going ahead with the investment, which was still awaiting approvals. But while this ended up being just a close call for Citic, other investors who bailed out subprime-affected banks have not fared as well.

Just a few weeks after the Citic-Bear Stearns tie-up, Citi said the Abu Dhabi Investment Authority would invest $7.5 billion to buy up to 4.9% of the bank. Citi issued equity units to ADIA that are convertible into common shares at a price between $31.83 and $37.24 per share. Until conversion in tranches in 2010 and 2011, the securities carry a coupon of 11%, payable quarterly. Citi's shares closed at $30.70 the day the markets learned of the ADIA investment.

Then UBS announced that the Government of Singapore Investment Corporation (GIC) and an undisclosed strategic investor in the Middle East would jointly invest SFr13 billion ($13.2 billion) to take a 10.5% stake in the Swiss bank. The investors bought notes convertible in two years, bearing a coupon of 9%. The shares traded at SFr57.2 on December 7. The conversion price is an average of the December 7 price and the volume-weighted average price of the three trading days prior to the extraordinary general meeting at which the issuer would seek approval, subject to a floor of SFr51.48 and a ceiling of SFr62.92.

UBS currently trades at SFr26.02.

On December 19 China once again stepped up to the plate with China Investment Corporation agreeing to a $5 billion infusion to acquire a stake of up to 9.9% in Morgan Stanley. The US investment bank issued equity units, bearing a coupon of 9% per annum payable quarterly, convertible into Morgan Stanley shares in August 2010. The conversion price was based on traded prices the week of December 17, with a floor set at a premium of 20% to the reference price. The reference price was $48.07-$57.68 per share.

Morgan Stanley traded yesterday around $41.

Merrill Lynch's gift to shareholders came on Christmas Eve when it announced Temasek and Davis Selected Advisors would subscribe to $6.2 billion of stock at a price of $48 per share. Merrill Lynch traded at $56 the morning of the announcement, so Temasek and Davis seemed to have got a good deal buying at a 14% discount to the traded price (though the investors bought straight equity so got no fixed coupon).


January brought both Citi and Merrill Lynch back on the road for another round of capital infusion.

Citi announced it would issue $12.5 billion of convertible securities to a consortium led by Singapore's GIC. The securities have a coupon of 7% per annum, payable quarterly, and convert at $31.62. Citi traded down to $26.90 the same day.

Merrill issued another $6.6 billion of convertible preferred stock that carry a 9% dividend and are convertible in 33 months based on the then traded price, with a floor of $52.40 and a ceiling of $61.31. Korean Investment Corporation, Kuwait Investment Authority, Mizuho Corporate Bank and others bought the stock. Merrill traded around $54.29 that day.

ADIA benefited from the further capital dilution Citi subsequently announced and the conversion price for the securities it holds is now set at $31.83.

Citi currently trades at around $20, while Merrill Lynch was quoted at $44 yesterday.

Specialists say all these investments have been made by the Asian and Middle Eastern investors with a medium- to long-term perspective and share price movements just three to six months later are not the correct way to view them. Indeed, better than expected first quarter results from Goldman Sachs and Lehman Brothers yesterday coupled with expectations of an interest rate cut in the US caused sentiment on financials to rebound and most bank shares gained, albeit marginally, corroborating how nervousness is driving trading rather than fundamentals.

Further, the investors are in many cases the largest single shareholder in the banks post-investment � a position they would not easily have been able to achieve through open market purchases. Another point specialists make is there is no way of knowing when markets have bottomed, thus buying at bargain basement prices is nigh impossible.

And a bad deal for one side is a good deal for the other. Bear Stearns has been hammered on the stockmarket but JPMorgan is widely perceived as having got a good deal and its share price gained 10% on Monday after the deal was announced to close at $40.31 and continued to gain on Tuesday to trade around $42.50 midday.

After Citic and Bear Stearns announced their cross-shareholding deal, it seemed that every other bail-out investor managed to secure a better deal than the Chinese saviour, with fixed coupons and in some cases discounts to prevailing share prices. But Citic is now no doubt having the last laugh as its $1 billion is still intact.

And even if all the points that specialists make with respect to the investments already committed are correct, the questions that remain to be answered are: which financial institution will be next to go belly up? And when it does, will investors from Asia and the Middle East be prepared to dole out cash again given how their first round of investments are trading?

How the Bear Stearns deal got done

Without the Fed's $30 billion, JPMorgan Chase couldn't have bought Bear Stearns without writing down its own mortgage holdings.
By Roddy Boyd, writer


NEW YORK (Fortune) -- The Fed's agreement to buy up to $30 billion in troubled Bear Stearns mortgage bonds may have saved JPMorgan Chase from a big writedown, according to senior executives involved in the transaction.

JPMorgan (JPM, Fortune 500) executives initially decided to pass on a purchase of Bear Stearns this past weekend, Bear execs said, largely because of the risks tied to Bear's mortgage portfolios. They changed their minds after the Fed agreed to pony up $30 billion in so-called nonrecourse loans - agreements that transfer the risk of Bear's bad mortgage bets to U.S. taxpayers. The Fed's decision paved the way for the Sunday evening deal that put Bear in JPMorgan's hands for $2 a share, a 93% discount to Friday's closing price.

But the value of Bear's balance sheet wasn't the only worry at JPMorgan. Bear execs say JPMorgan was also worried that without help from the Fed, buying mortgages from Bear (BSC, Fortune 500) could force JPMorgan to write down the value of its own mortgage holdings.

That fear stemmed in part from the sharp decline in the value of mortgage debt this year, along with the different calendars the firms report on. At the end of February, Bear had $16 billion in commercial mortgage-backed securities, $15 billion in prime and Alt-A mortgage bonds and $2 billion in various subprime bonds, JPMorgan said. The value of those securities has been in sharp decline, along with U.S. house prices. Indeed, values in the mortgage securities market have plunged just over the past month, as investors in lenders such as Thornburg Mortgage (TMA) - which is dealing with unmet margin calls triggered by plunging prices - will surely tell you.

Bear Stearns collapse

10 biggest Losers
JPMorgan Surges After Capturing Bear Stearns for $240 Million

March 17 , 2008(Bloomberg) -- JPMorgan Chase & Co. surged in New York trading after striking a deal backed by the Federal Reserve to buy Bear Stearns Cos. for $2 a share, 90 percent less than the 85-year old firm's market value last week.

Citic Scraps Deal

Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under terms of the JPMorgan takeover, his holdings are now worth about $12 million.

Joseph Lewis, Bear Stearns's second-largest shareholder, has spent more than $1 billion on the firm's stock since September, paying as much as $150 a share. Lewis, a 71-year-old billionaire, wasn't planning to reduce his stake, a person close to him said March 11. He's now entitled to $22 million of JPMorgan shares.

Beijing-based Citic Securities Co. canceled a proposed $1 billion investment in Bear Stearns, said Kong Dan, chairman of Citic Group, the company's parent, in an interview today. Citic had agreed in October to buy a stake in Bear Stearns when the company's stock was trading at more than $117.

45-Story Building

``To see a situation involving a bailout lead to shareholders getting pretty much wiped out is a pretty significant event for the market,'' said Ben Wallace, who helps manage $800 million, including stock in JPMorgan, for Grimes & Co. in Westborough, Massachusetts. ``It's going to raise concerns'' about the value of financial stocks, he said.

The Fed's attempt to rescue Bear Stearns last week with a cash infusion failed to avert a crisis of confidence among the company's customers and shareholders, who drove the stock down a record 47 percent on March 14, when the emergency funding was announced.

Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per- square-foot that comparable office space in the city is currently fetching.

Counterparty Risk

JPMorgan Chief Financial Officer Mike Cavanagh said on a conference call after the sale was announced that the bank was comfortable with the values Bear Stearns had assigned to the mortgage-related assets on its books. Asked to explain why JPMorgan was paying about $2 a share for a company with a book value -- assets minus liabilities -- of $84 a share, Cavanagh said the price reflected the risk the firm was taking.

It ``gives us the flexibility and margin of error that's appropriate given the speed at which the transaction came together,'' he said. JPMorgan said it was confident Bear Stearns shareholders would approve the sale.

``If you're buying equity for free and the liabilities are pretty well capped, it sounds like it's good for JPMorgan shareholders,'' Wallace said. ``The thing that everybody's been worried about has been the counterparty risk, and if this gives people more confidence, that will be good for the markets.''

`A Lot of Value'

Minutes after the deal was announced, the Fed cut the so- called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it.

Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts said.

The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July during the biggest housing slump in a quarter century.

``As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,'' said William Fitzpatrick, who helps oversee $1.6 billion at Racine, Wisconsin-based Optique Capital Management, including JPMorgan shares. ``That's the crown jewel, and that would fit into JPMorgan's business extremely well.''