Bear News Wreaks More Havoc on Market

March 17, 2008

Well, we’ve learned in the past few days, in gory detail, precisely why some of us have been so very worried about the stranglehold within the credit markets. It was never just about a run-of-the-mill slowdown in the economy, or a meaningless debate about whether we were or were not officially in a recession.

No, in becoming essentially the first I-bank to be bailed out by the Fed, Bear Stearns has shaken the financial markets to their very core. And there's a good reason for that, again having to do with the insidious nature of this credit crisis: There's no confidence in what anyone says. Not because they're trying to pull one over on us (usually), but because the people running many of the world's leading financial-services firms simply don't know what they're talking about. They can't. Have you taken a look at the group's so-called Level III assets recently, the stuff they can't value with any degree of certainty? Be sure to when the big Street banks start reporting their numbers this week.

When Bear CEO Alan Schwartz said just a few days back that the liquidity picture at his firm was OK, there's little doubt he was telling the truth. Fast forward to today and he has had to sell one of Wall Street’s most-storied firms for nothing, and was basically told to do so by the government.

Needless to say, this isn’t quite the kind of transaction dealmakers were looking for to get the M&A market engine revved up again. A year ago, yeah, we in the media would probably be making some kind of reference to “Merger Monday” involving a giant Wall Street broker for tens of billions of dollars. Instead, on this particular Monday morning we were simply left shaking our heads at the latest twist in Wall Street’s version of Armageddon, wondering further about how the whole thing happened.

Aside from what appears to be a near-collapse in the confidence of a large institution to simply repay its debt — not exactly one of the recipes in the concoction needed to make the M&A market healthy again — mergers tied to the private equity crowd are now even more increasingly in doubt.

Leading up to all of the previous chaos, the mantra still seemed to be that the middle-market transactions were still getting done. Sure, there were hints of some erosion popping up, but by and large deals were still getting done in the smaller arena. This latest turbulence may mark the toughest test yet for the resilient middle-market space; the news from Bear may or may not change the dynamic of transaction among smaller players, but it’s tough to see how it helps.