Business Props: The Next to Fall

After Bear Stearns bit the big one, which investment bank will disappear next? Plus, a look at the future of Digg.com

April 16, 2008

By Jason Brough
Bodog Nation Contributing Writer

If you haven't noticed, there's a wee bit of chaos in the world's financial markets. Oil prices are surging, home prices are crashing. The United States is teetering on recession; China is ready to pounce. In the last few months, investors have watched the stock market fluctuate more than a hummingbird on meth. One day, the credit crunch is going to be the ruin of capitalism. The next sees the government stepping in to bail everyone out.

While most look at these days of unpredictability as a negative, tumultuous times are usually when the smart guys get rich. Take JPMorgan Chase's acquisition of rival investment bank Bear Stearns back in March. When the latter realized its investment in pools of subprime mortgages was about to take it down, the former stepped in and, with the help of the Federal Reserve, bought it for $10 per share. The original price was $2 per share, which valued the long-standing institution at a peanuts-like $250 million. It was once worth $25 billion.

Not surprisingly, the fall of Bear has many speculating on who will be next.

"Even though Bear was probably on the fringe, pushing the envelope anyway, traders are saying that because it happened, it could happen to somebody else," said Brandon Thomas, chief investment officer for Portfolio Management Consultants.

The most worrisome appears to be Lehman Brothers, and its share price confirms just that. A year ago, it was trading in the $80 range. Today, it's around $40. Oddsmakers are giving Lehman 7/4 odds that it will be the next one to shut down or be sold. After Lehman, it's Goldman Sachs at 3/1 while the long shot of the bunch is Citigroup at 10/1.

Of course, if you believe the guys in the nice suits, the subprime mortgage crisis is over. No need to worry anymore. On Tuesday, Lehman Chief Executive Dick Fuld said at the company's annual meeting that the "worst is behind us."

Shortly before Fuld's remarks, Morgan Stanley CEO John Mack said the crisis was in the "bottom of the eighth inning or top of the ninth." (Probably depends who the home team is.)

Warning: This is going to get a bit technical. But one of the things that investors should be looking at when assessing the risk profile of each investment bank is the amount of so-called "Level 3" assets that they hold. Long story short, Level 3 assets are securities that can’t be assigned a market value. Most of these securities are probably fine, but some aren't. And when it turns out the value of certain Level 3 assets is bupkis, their owners take a hit, or what's called a write-down.

"Assets that are tough to value could or could not be problematic. That uncertainty is in itself problematic," said Mamoun Tazi, an analyst at MF Global Securities.

Level 3 assets might be part of the reason Goldman Sachs – whom many consider the rock of the investment banks – is at 3/1 to shut down or be sold. Goldman has $96.4 billion worth of Level 3 assets, according to a regulatory filing with the U.S. Securities and Exchange Commission last week.

That's a lot of... well, we don't know... that's the point.

Digging For a Deal

Yahoo's Jerry Yang is still dancing with suitors. (AP Images)

Two months ago, we looked at the pending Microsoft-Yahoo merger. That one's still very much up in the air and Microsoft CEO Steve Ballmer has gone so far as to threaten a hostile takeover battle. Too bad Yahoo seems to want to pair with anyone except Microsoft. All the while, Google watches from its death star, er, Mountain View headquarters.

While not as big a deal as the whole Microhoo affair, another popular internet company has been on the block for what seems forever without finding a buyer. On March 7, TechCrunch reported that Digg.com "has been working with influential investment bank Allen & Co. for a few months now, and pitching big tech and media companies on a sale."

Granted, rumors surrounding Digg have been around since early 2006 when blogger Kevin Burton reported that Yahoo was about to purchase the social bookmarking site for $30 million.

Flash forward to November 2007 when the price was purportedly between $300 to $400 million, according to Valleywag.

Last month, Michael Arrington wrote this: "Digg is prepared to take less than the $300 million Allen & Co. were floating late last year. Google, our source says, will likely bid $200-$225 million, which Digg would likely accept."

Oddsmakers have set the over/under price of $218 million.

Whether a sale happens by the summer, "Yes" is at -130 while "No" is at -110.

At 1/1, Google remains the favorite to snatch up the site while Microsoft is at 3/1.

TOP PHOTO: The New York Stock Exchange has been a chaotic place. (AP Images)