Is Bear Stearns Solvent?

Re a (possible, hypothetical, fanciful) bankruptcy for Bear Stearns—I’ve been part of some offline chat on the question whether Bear Stearns was “solvent.” Of course, insolvency is not a threshold requirement for bankruptcy, but let that pass. Was/is Bear Stearns “solvent”? Do its assets exceed its liabilities?

Take a look at the balance sheet from November 30 (link) (which, as someone has said, is very likely the last ever). That shows equity of $12 billion against liabilities of $384 billion—for those keeping score at home, a debt/equity ratio of 32. I can’t find a figure for market cap back then, but a chicken-scratch derivation from current numbers suggests it might have been around $20 billion.

But now? I suppose one measure of solvency might be that JPM was willing to lay out $270 mill for the equity (of course that’s after a $30 bill put from the taxpayers). If liabilities now are the same as they were then, that makes a D/E ratio of ah, er, huff, puff, 1,422.

But there’s another way of approaching the matter. If you could market-cap all the BS debt today and top it off with $270 mill, I suspect you still wouldn’t have a number as high as the debt on its face. So insolvent. So why an equity stake? Try this: it’s by now common parlance among finance types to treat the equity on a leveraged balance sheet as a call option on the assets. I suspect that what we have here is a deep out-of-the-money call—the flicker of hope that something, somehow, from somewhere, just might turn up. Keep it up, folks, the cavalry is coming! Or maybe not.

Update: As I write (1052 am pst March 18) Yahoo is quoting Bear at 6.88. That would capitalize at over $900 mill. Evidently somebody out there thinks the option is worth picking up.