The revelation that control of Bear Stearns will now be bought by JP Morgan for $US10 a share rather than just $US2 helped put a rocket under US stocks last night as investors punted that we might have seen the worst of the global credit crunch.

Alan Kohler summarised the hilarious Bear Stearns acrobatics with great elan on Business Spectator.

Bear Stearns shares rocketed 88.7% to $US11.25 amid great relief that the former $US21 billion giant was at least worth more than the value of its Madison Avenue headquarters.

And even JP Morgan shares managed to rise by 1.26% despite increasing its bid by 500% and agreeing to cop the first $US1 billion of liabilities ahead of the US Federal Reserve’s $US30 billion guarantee.

There was a strong recovery amongst Australian financial stocks this morning, none bigger than Babcock & Brown which rocketed $1.12 or 8.8% to $13.86.

Whilst incoming Macquarie Group CEO Nicholas Moore stays hidden away, his Babcock counterpart Phil Green continues to mount a PR offensive, subjecting himself to a detailed KGB cross-examination on Business Spectator over the Easter Break.

Amid various disclosures, Green confessed that Babcock is looking at paper losses of about $200 million on its $1 billion worth of investments in the various listed Babcock funds. This is the smokey in the pack for Babcock and Macquarie Group, which recovered $4.10 to $53.60 in morning trade.

Both groups are facing write-downs on their investments in various funds, which continue to trade at massive discounts to net tangible assets (NTA), due to a quadrella of concerns spanning excessive debt, excessive fee leakage, poor governance and financial complexity.

It is mark-to-market accounting which is killing those with sub-prime exposures the world over and if Macquarie and Babcock do likewise on these stuttering listed fund investments, their record of consistent profit and dividend increases will come to a screeching halt with the next earnings release.

Babcock is being far more pro-active in this regard than Macquarie. As a loss-making unitholder in Everest Babcock & Brown, a letter arrived this morning promising that the non-executive directors are conducting a thorough review of “all available measures” to eliminate the huge trading discount to NTA.

The best option, of course, would be to sack the external manager and stem the fee leakage, but Phil Green wouldn’t want that. This is the huge test facing the dozens of supposedly independent directors populating the various Babcock and Macquarie vehicle.

For instance, the world’s biggest tollroad operator, Macquarie Infrastructure Group, is now trading at a 43% discount to NTA. The model is dead and the board should address this by following the lead of GPT, Transurban and Westfield and internalise management.

Check out two new Mayne Report lists tracking the backgrounds of members of the Australian directors’ club.

Peter Fray

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