Bear Stearns evaporated. Other banks ran to the Federal Reserve Bank for emergency funds. And as the world stood watch for a possible meltdown of the U.S. financial system, Visa Inc. launched the largest initial public stock offering in history.
Amid financial calamities not seen since the Great Depression, Visa’s IPO raised more than $19 billion Wednesday.
Its stock, initially priced at $44, was up more than 46 percent, closing Friday at $64.35.
Visa began as an association of banks offering the “BankAmericard” in 1958. It does not carry consumer debt. Its member banks do that. All Visa does is take a tiny bite out of each transaction.
Investors loved Visa’s IPO for several reasons. Credit cards are fast replacing cash in most ordinary transactions — even vending machines. MasterCard’s 2006 IPO has more than quadrupled in value. And unlike most other financial companies, Visa does not make loans that could go into default during in a recession.
The primary reason for Visa’s success, though, is supply and demand. Investors love IPOs, but there aren’t many good ones.
Last year at this time, the U.S. stock market saw 47 IPOs. This year, there have been only 22.
Additionally, most IPOs come from tiny, little-known companies, such as Asia Time Corp., a 30-employee maker of watch components that went public for $3.50 a share last month and now trades for $4.75.
Visa has been in business for 50 years, and its brand is universally recognized. This makes its stock a rare commodity — and its value is more a reflection of market demand for a hot IPO than the company’s fundamental prospects.
It’s a good bet momentum may keep pushing Visa higher.
Not only did the banks that own Visa make a killing selling stock last week, but they still retain half the company and can always sell more stock as it rises higher.
Bank of America made $626 million. Citigroup made $300 million. Wells Fargo made $273 million. And the 41 Wall Street brokers that underwrote the deal are expected to earn fees of more than $500 million.
But get this: The biggest beneficiary of the Visa IPO was JPMorgan Chase, which bagged more than $1.3 billion.
Also last week, the Federal Reserve Bank subsidized JPMorgan’s deal to buy failed brokerage Bear Stearns, which it got for $2 a share, or about $342 million.
To make even this bargain-basement deal viable, the Fed agreed to take on $30 billion worth of Bear Stearns’ garbage-loan portfolios. It seems the nation’s fifth-largest investment bank had gorged itself on subprime loans.
In addition to bailing out Bear Stearns, the Fed also handed out tens of billions to Wall Street investment banks and commercial banks, last week, in the form of 2.5 percent discount-rate loans.
This unprecedented government bailout of Wall Street is designed to protect the U.S. financial system from a collapse.
Meanwhile, the U.S. financial system can still churn out a good IPO.
JPMorgan, in fact, earned enough from Visa to buy Bear Stearns and still have $1 billion in extra change.
Al Lewis’ column appears Sundays,Tuesdays and Fridays. Respond to him at , 303-954-1967 or alewis @denverpost.com.
