“This is not a time to be a hero in financials.”

Such were prescient words from David Merkel, whom I regard as one of the best investment bloggers out there - and this was before the quite stunning $2/share takeout offer for Bear Stearns (BSC). Odds are, that doesn’t make for a nice scene for financials to start the week. A couple thoughts:

-When the Fed cut heavy in January, pretty much every financial stock rallied with the lower-quality institutions handily outperforming their better peers. If that wasn’t a false rally, I don’t know what is. What happened with Bear today just reinforces my belief that you cannot touch any firm which does not have excess capital. Be it commercial paper, deposits, or something else, financials that do not have a reliable source of cash have been getting killed to the point where it is insane to speculate that trend will stop. It’s very similar to tech in the last earnings season…

-With Barron’s noting that Bear’s headquarters has a value of more than $1 billion, the $2/share takeout price places a negative value on Bear’s continuing business. A few people have asked how this is possible, mostly out of incredulity I would believe. When you’re leveraged at upwards of 20x, your assets are decreasing in value, and you’re stuck in an illiquid position, very bad things can happen.

-In Q4 2007, Bear spent $375 million repurchasing its own stock at an average price of $108/share… talk about destruction of value. It probably would be nice to have a mulligan on that, seeing as that amounts to about 1.5x what J.P. Morgan (JPM) is paying for Bear. Either Bear’s board was trying to prop up the stock, or that they didn’t foresee this coming. Regardless of the scenario, it’s disturbing.

-If there is some irony to be had, looking at Bear’s risk exposures as detailed in the last 10-K shows how worthless statistics can be when it comes to application in financial markets. At a 95% confidence level, Bear pegged aggregate VaR at $69 million. This is all well and good until you consider that the market value of Bear Stearns equity is going to be $3.8 billion lower than it was at market close on Friday. Somewhere, Nassim Taleb is laughing.

-Some fingers are going to be pointed at Alan Schwartz, Bear’s CEO, after he spent a week saying things are fine before blowing his equity holders out of the water over the weekend. Realize that he was stuck between a rock and a hard place in that acknowledging liquidity issues would only accelerate Bear’s decline - and this is all a result of a mess that was not solely of his own doing.

-While you have to feel for the employees at Bear, who look set to lose their jobs and a big chunk of net worth, on a whole I think this deal is necessary and will make the financial system better as a whole. Yes, it effectively required wiping the equity holders clean - but I really do think that was needed, just like what happened with Countrywide (CFC). Bubbles come along, people make lots of money because the market is right for their style, things turn and those marginal players need to be removed from the game so you’re left with participants who are, on average, better suited to tough environments. Moves of this magnitude make the system get closer and closer to finding a long-term bottom.

-All of this calls to mind the heavy put volume that took place earlier last week all the way down to the $10 strike level. Someone knew something, made a statement bet, and a lot of money. Given what Bear’s public line was, did this person or persons know something the public didn’t?

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