JP Morgan: We want to pay more for Bear Stearns
posted at 8:57 am on March 24, 2008 by Ed Morrissey
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The weirdness on Wall Street continues. The world’s greatest fire sale has turned into something of a fiasco for JP Morgan, who thought they had Bear Stearns wrapped up in a bow by the Fed at $2 per share. However, the deal has started unraveling thanks to angry BSC shareholders, and JPM now has quintupled its offer to $10 per share:
The sweetened offer is intended to win over stockholders who vowed to fight the original fire-sale deal, struck only a week ago at the behest of the Federal Reserve and Treasury Department.
Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share — a figure that represented a mere one-fifteenth of Bear’s going market price.
The Fed, which must approve any new deal, was balking at the new offer price on Sunday night after several days of frantic, secret negotiations, these people said. As a result, it was still possible the renegotiated deal might be postponed or collapse entirely, said these people, who were granted anonymity because of their confidentiality agreements.
If the Fed were to reject the new proposal, it could set off a furor among shareholders of both firms that the government was preventing them from making a fair deal.
The Fed may have caused some of the problem itself. Its new $200 billion lending facility could have been used by Bear Stearns to reverse some of the bad paper it has acquired. That has shareholders who bought BSC when it rode high wondering why they need to sell their assets at 6 cents on the dollar now.
They especially object to the Fed’s pushing of the $2 share price after working with JPM to guarantee $30 billion of BSC’s worst-performing assets. BSC shareholders ask why the Fed simply didn’t offer that guarantee to BSC instead, and why they forced such a low price for the deal. The answer — that the Fed didn’t want to be seen bailing out Bear Stearns and especially the management that created its crisis — hasn’t satisfied the people holding nearly-worthless BSC shares. They feel as though they have to sacrifice for the Fed’s need to save face.
The irony, of course, is that without this deal, the shareholders would have had no value at all. Bear Stearns would have sunk under the red ink of its bad paper, and instead of 6 cents on the dollar, the only value the shares would have had would be as kindling for a warm fire in a winter cabin. But the structure of the bailout left the obvious question of why the Fed had acted in such a Deus ex machina manner, picking winners and losers with what looks like a hefty dollop of capriciousness. Why not just provide the same guarantees to BSC contingent on the removal of the board and chief executives, for instance?
This is the problem with muscular government intervention in markets. Even though BSC deserved bankruptcy for its terrible management in the marketplace, the fact that the government (or its auxiliary in the Fed) determined the winners and losers makes it political rather than the natural result of gross incompetence. The problem with the increased share price is that it makes the Fed action more clearly a bailout of BSC shareholders, and the Fed’s own guarantees make a higher share price inevitable. (via Tom Maguire, who has more thoughts)
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If BSC filed a Chapter 7, everyone’s money in BSC would be tied up for years as various bankruptcy proceedings went forward. Meanwhile, FDIC and/or SIPC would be called upon to make good on their deposit guarantees. All in all, a very ugly situation that would result in a lack of confidence in our financial system — and all the money going into the pockets of the lawyers.
Do I like the Fed getting involved in bailouts of investment banks? I’m not sure. I don’t know why they decided to make the discount window available to non-FRS banks (i.e. investment banks).
But I guess at the end of the day, I don’t feel as terrible about JP Morgan buying out BSC in a fire sale to short-change the bankruptcy process as I think some of you may.
Outlander on March 24, 2008 at 9:11 AM
Anybody feel uncomfortable about the government stepping into these matters like I do? I used to worry about Hilary Care, and this doesn’t make me feel any better.
bucktowndusty on March 24, 2008 at 9:16 AM
It’s like reality itself is in on the joke.
LimeyGeek on March 24, 2008 at 9:16 AM
Get the FED involved and you automatically have problems. The FED needs to stay out of the private sector. If the gov’t made beer, a six pak would cost $50.00. Bear/Stearns should be in chapter 11.
pueblo1032 on March 24, 2008 at 9:18 AM
Illuminating.
Kralizec on March 24, 2008 at 9:22 AM
The fed had no choice. If Bear Stearns went under it would’ve triggered worldwide panic/collapse.
tlynch001 on March 24, 2008 at 9:26 AM
Because Bear Stearns was a market maker for a huge number of securities. If it went under, it would be hard for those to be traded. This could then lead to a market melt down.
SunSword on March 24, 2008 at 10:02 AM
Did you write the screenplay for “Independence Day”?
LimeyGeek on March 24, 2008 at 10:04 AM
What could possibly go wrong with a federally-induced stock deal that took place behind closed doors on a Sunday?
awake on March 24, 2008 at 10:06 AM
A comedy of errors.
- The Cat
MirCat on March 24, 2008 at 10:07 AM
Yes I did, but that doesn’t take away from how serious things would be if Bear Stearns went under.
I’m not saying I like bailing them out, but it had to be done.
tlynch001 on March 24, 2008 at 10:13 AM
Who was supposed to be overseeing all this while they were obsessed with contempt citations for Meiers and Bolten?
drjohn on March 24, 2008 at 10:19 AM
It is nice to see that confidentiality agreements just mean that you don’t tell people your name when you spout off secret information.
raiderdav on March 24, 2008 at 10:30 AM
Umm, for all intents and purposes, BS did go under.
awake on March 24, 2008 at 10:30 AM
And a plunder of the treasury resumes.
Dr.Cwac.Cwac on March 24, 2008 at 10:37 AM
What the “Fed” should have done is back up “Freddie and Connie” directly. Backing these quasi-governmental agencies directly would be a winner for the middleclass taxpayers when the sub-prime mortgagees paid off their obligations.
As of now the “Feds”30 billion is the only incentive JP Morgan has to bail out BS. Why go through any third party[s] that has demonstrated poor judgment and incompetence or worse, in the past?
They are all “peas in a pod”. I say!
J_Gocht on March 24, 2008 at 11:01 AM
Fed bails out Wall Street Fat Cats guarateeing BS bad paper while those underlying assets still get foreclosed.
Sorry homeowners.
danking70 on March 24, 2008 at 11:07 AM
Liquidating Bear Stern’s company real estate will bring JP Morgan more than their total bid, which is what has puzzled stock holders in BS.
This deal needs to be slowed and examined before it becomes simple plundering.
profitsbeard on March 24, 2008 at 11:31 AM
Yes. called this last week and just about doubled my money. Got to love capitalism. The entire street is based on two emotions fear and greed. It matters not what assets they have, fundementals do not matter in the short run, it doesn’t matter how much money a company makes or loses. All that matters is fear and greed. Last weekend there was the fear rightly so of the entire financial system of the USA and possibly the world coming undone if Bear Streans went under. The FED did what was right and saved BEAR Stearns and wall Street. If not for all the whinny little brats in this country that are practicing class warfare the Bear Streans bailout would have been done months ago for 1/30th of what it finally “cost” the taxpayers not to mention all the wealth lost by pensions, 401k accounts, etc.
Now greed is the stronger emotion on the street. Greed is pushing the prices higher, All because the FED stepped in and put a floor under the investment banks and the regulated banks. The Fed “spent” 30 billion and has created trillions in wealth within a week. that is a great return on investment. Since the FED’s move on monday the market is up, the banks are lending, the mortage rates are dropping, gold has fallen off the cliff, oil is retreating.
Now what is “bad” about this? Would you rather be a wealthy nation or a poor nation? The FED did a wonderful job. If not for politics to make all the uneducated class hating people happy then the bailout would have been for $20-30 per share.
unseen on March 24, 2008 at 11:48 AM
profitsbeard on March 24, 2008 at 11:31 AM
I didn’t see anyone else stepping up to the plate to save BS during the storm. I didn’t see anyone else willing to lay their assets on the line to prop up the Financial sector. why shouldn’t JPM get the windfall for having the courage to resuce the USA economy during times of great risk and stress. Noone knew how the news would be recieved on Monday morning. we could as easily had a massive selloff of the entire market. JPM could have had a run on its own bank if people thought they were being too risky. No. JPM deserves every penny they made.
unseen on March 24, 2008 at 11:51 AM
Umm, for all intents and purposes, BS did go under.
awake on March 24, 2008 at 10:30 AM
Ummm No Bear Streans opened for business Monday morning, BS was still the market marker for 1/7th of the stock market on Monday morning, it did not close its doors, it did not stop the free flow of credit, transactions, investment banking. there is a difference between being bought out and going under.
unseen on March 24, 2008 at 11:54 AM
J_Gocht on March 24, 2008 at 11:01 AM
the Fed does not work alone. the fed government did back up Freddie and Fannie with decraseing capital requirements. $200billion more is able to be put to work with a wave of the pen. Now people can get mortages which means the “middleclass” can now sell their homes. It also means that banks can again lend money becasue now they have a buying for the loans in Freddie and Fannie. Add into the mix the increased confidence of the financial markets with the BS bailout, the decrease in interest rates, the decrease in oil and gold, and food stuffs and you have a very pretty picture of a roaring economy in 6 months time instead of the very real and very possible depression that was seen just last week. Those that do not understand that economies, inflation, and nations are based mostly on emotion is doomed to have Zimbamwa type economies.
unseen on March 24, 2008 at 12:01 PM
Fed bails out Wall Street Fat Cats guarateeing BS bad paper while those underlying assets still get foreclosed.
Sorry homeowners.
danking70 on March 24, 2008 at 11:07 AM
Who says they are bad paper? the problem is noone knows if they are good or bad thus noone wants to take the risk. It could just as well be a great paper and the FED (i.e the taxpayers) make a killing in the real estate business. It has happened before. the taxpayers made money on the chrysler bailout, they made money on the S&L bialout. When the panic is in the streets and assets are selling for next to nothing and the fed gov steps in and buys this “worthless paper” on the cheap and sells it back during good times the taxpayers make money on the paper, they make money on the increase in tax reciepts for wall street, they make money because of good economics etc. It is not cnace that has enabled us to become the richest nation in the world. It is strong leaders that step up to the plate to do what is right duirng times of fear and panic and dame the poltical consequences. Bush was not that leader last year. This month he was.
unseen on March 24, 2008 at 12:06 PM
I can’t believe some of you people. Bail out a major investment firm??? Bail out people who overbought their houses??? What’s next? I can’t make my credit card payment… I can’t make the next payment on my Lincoln… Bear/Stearns goes into bankruptcy, the world economy will collapse…That is such a line of B.S. WAAAAA, WAAAAA, WAAAAA. Remember survival of the FITTEST??? Only the strong survive??? That which doesn’t kill you, makes you stronger. This is AMERICA,bend over grab hold of your ears, and pull real HARD!!! Maybe than you will remember what made (makes) this country GREAT!!!
pueblo1032 on March 24, 2008 at 12:08 PM
I admit my total ignorance.
Question is; why not underwrite Freddie and Connie’s paper directly?
Would this totally disrupt all the third party investment banks now making those shaky guarantees without sufficient funds, today?
From my point of view as a tax payer and stock holder; it’s not class hatred, rather an issue of fairness.
I believe I missed your comment concerning, “fear and greed”.
J_Gocht on March 24, 2008 at 12:11 PM
pueblo1032 on March 24, 2008 at 12:08 PM
Class warfare is the biggest threat to this country. It is a bigger threat then terror. Our economy is a row of dominos. Pull down one and the rest fall. Just because you do not undersatnd that and think it is BS does not mean it isn’t true. The strong did siurvive. JPM did not engage in subprime. It had a clean balance sheet and thus was able to gobble up BS on the cheap. If more people were taught economics 101 in school instead of class warfare then maybe people would not be too stupid to see the ramifications of a Bear Streans failure on our ENTIRE economy. Luckly we had leaders that were taught economics in office they did the right thing as the uneducated cried that it was a “bailout” and that the rich was being saved. Now if only more CEO understood economics instead of the bottom line then we would not have outsourcing, illegal immigration, lax enforcement of regulations etc.
unseen on March 24, 2008 at 12:14 PM
J_Gocht on March 24, 2008 at 12:11 PM
Life is not fair. I don’t know how many times my parents told me this as a child and I have told my child the same countless times. In a capitalistic society you need the rich, the middleclass, and the poor.
that being said If I understand your question correctly. your asking why not cut out the middle man? while it would be cheaper and easier to do so in the short run, in the long run you need the middlemen (the rich) to insure a capitalic sytem. If the gov cut out the middleman now it would not be long before the entire economy no longer had the capital to fund economic expansion. what the media is not telling you is that many rich lost great fortunes on Bear and Streans. Joe Lewis lost almost $800miilion on his investment with Bear Streans, the CEO and the employees of Bear Streans that did the bad deals, the crooked deals had much of their wealth in Bear streans stock. They lost everything or close to everything because of their actions. the Fed did not bailout the “rich” they bailed out the economy. sure some of the rich got a lifeline but some didn’t. Just like with subprime housing some of the poor/middleclass will get lifelines and some will not. When the Titanic is sinking you arren’t going to stop the loading of the life rafts because a murderer may be among the group getting on the boat. You can and will deal with that later first you save what can be saved.
unseen on March 24, 2008 at 12:24 PM
unseen on March 24 at 12:24PM
Ain’t no class envy in my statement at all. I love rich folks. I even want to get rich still. I cant’ remember ever getting a job from a poor man in my life!!! Bear/Stearns has been dealing from the bottom of the deck for a long, long time. Check the facts. This company has the law of averages catching up to it. There isn’t anyone on the STREET shedding any tears for Bear/Stearns, NOBODY!!! Again GRAB YOUR EARS…
pueblo1032 on March 24, 2008 at 12:39 PM
You understood my question exactly and I appreciate your insight.
Next question…
My son and his family with a credit score between 750-800, have been trying to renegotiate their present mortgage at [5.75] percent. The best rate they could get last week was [5.2].
Why is that; because the banks make loans based on the “treasury rate” and not the difference between the “prime rate they [the banks] are charged?
How long, time wise; does it take for the “treasury rate” to mirror the prime rate within say, 2.5 percent?
In other words, at what rate, would you personally pull the trigger?
J_Gocht on March 24, 2008 at 12:44 PM
Ain’t no class envy in my statement at all. I love rich folks. I even want to get rich still. I cant’ remember ever getting a job from a poor man in my life!!! Bear/Stearns has been dealing from the bottom of the deck for a long, long time. Check the facts. This company has the law of averages catching up to it. There isn’t anyone on the STREET shedding any tears for Bear/Stearns, NOBODY!!! Again GRAB YOUR EARS…
pueblo1032 on March 24, 2008 at 12:39 PM
I also shed no tears for Bear Streans. I could care less if it was Bear Streans or goldman or lehman that needed to be saved. the CEO and its management was the cause of the problems in the first place. however their are other ways to punish these people besides destroying the entire economy. I would have no problem if the Feds brought charges like in enron on the managment. The problem that unlike enron a failure at BS I.E insolvency would have started a cascading feedback loop that could have brought the entire economy down to its knees. So you take the good with the bad and in this case the good of the Fed actions outweighs the bad. the market seems to think so too. Homes sells increased this month.
unseen on March 24, 2008 at 12:50 PM
_Gocht on March 24, 2008 at 12:44 PM
Thinks are happening very quickly at the moment. So things could change tommorrow so take this for what it is worth.
The simple answer to why the rates are staying high is because the banks need to make more money due to their losses in the subprime credit problems. they are attempting to recapitalize their balance sheets. I would guess that the cheapest rates would be found at the banks with the best balance sheets. JPM comes to mind or possibly some S&L companies. That being said rates will remain higher than normal but should fall for the next month or two. hopefully falling rates will spur more people to refinace homes that they can not presently afford and spur some to buy a home. the increase in demand should allow home prices to stablize which would allow the ecomoy to stablize. the majority of rate cuts are still new to the system the FED cut big but they cut quickly so you may see rates slowly decrease for the awhile. I wouldn’t be surprised to see rates at 4.5% in the next several months IFIFIF the finacial system does not show more cracks like Bear and streans. There is a fear premium in the rates still as banks are skidish to lend to people still and are in a protect the capital mode. I think it will be the stabilization of home prices that will bring rates down to their lowest amount.
saying all that you can see it is tricky to try to pick the bottom. So if I was giving advice I would say for them to figure out a rate they can afford comfortably. And then lock in that rate once it hits their target ( they can always go lower if rates fall much below their new rate.) . rates could just as easily start to climb again if banks pull in their lending again due to fear of bank insolvency. say if a Citibank goes under or is “bailed out”
unseen on March 24, 2008 at 1:07 PM
There is a transition period and you know that. When someone buys you out, with the exception of the Godfather movies, you actually make a profit on the buyout. That usually does not include a stock that sold for 50 a share down to 2 per share over a 72-hour period.
Couple that with the 30 billion in risk protection the fed pledged and you can call it a buyout all you want…nobody’s buying it though.
awake on March 24, 2008 at 1:23 PM
call it a buyout all you want…nobody’s buying it though.
awake on March 24, 2008 at 1:23 PM
Its called a buy under. that being said, BS did not “fail” because of the FEd actions. It continued to function within the financial framework under new management. If not for the FEd it would have failed and it would have caused panic. All I’m saying is that BS did not go under in the classical sense of the word. If it did things today would be 180degree different in the markets and in the economy.
unseen on March 24, 2008 at 1:33 PM
awake on March 24, 2008 at 1:23 PM
Countrywide did the same thing. Bank of America made a buy under, it would have been bankrupt if not for the FEd and Bank of America. wonder why noone said anything about that Fed induced marriage.
unseen on March 24, 2008 at 1:35 PM
Any person can criticize. To give constructive criticism requires knowledge, understanding and empathy. I have noted that some on this board have assiduously avoided being constructive in their posts…
I have no clue if “unseen” works for “you or thee or the man behind the tree”; however, from the essence of “unseen’s” posts I would believe that a very critical impasse was avoided by the action of the FEd with respect to Bear Stearns.
Thanks for a review of, Econ 101, “unseen”!
…and they said “you can’t teach olde dog new tricks”.
Enlightenment even…!
J_Gocht on March 24, 2008 at 2:38 PM
Then the classics be damned. The whole thing stinks. It is a mirage. I know why the feds did it, but it is merely a short-term solution.
awake on March 24, 2008 at 3:50 PM
but it is merely a short-term solution.
awake on March 24, 2008 at 3:50 PM
It’s been working for 70 years now. If that is short term I’m ok with that…
A house of cards is ok to live in as long as everyone knows its a house of cards and takes precautions to not blow the house down.
unseen on March 24, 2008 at 4:00 PM
So, why doesn’t the Government simply take over that area of business. Since its obviously truly critical to the world economy, and can’t be trusted in the hands of the public (who might fail to properly manage it) we obviously need Government intervention to keep it running.
So why all the hand-waving. Since this is what the Government needs to be doing, and it is correctly the Government’s place to fund it for any failure; why pretend its a public business?
Obviously the Government is on the hook for everyone of these businesses that would be party to a “cascading failure” and will shell out enough to buy the companies outright… so why are they not getting any value for the investment of my money?
gekkobear on March 24, 2008 at 4:46 PM
……
……
Holy Jesus, “unseen”…You’re asking for a steady hand, that most likely doesn’t exist? Have you ever turned over in bed and kicked your better half?
How does that go?
Though your words were meant to encourage and they do; what the hell do you really think?
Truth to power!
J_Gocht on March 24, 2008 at 5:09 PM
“unseen…”
We’re waiting, like “birds in the wilderness”.
You say!
J_Gocht on March 24, 2008 at 7:07 PM
“unseen…”
STOP…!
Thank You,
…so very much…!
J_Gocht on March 24, 2008 at 7:11 PM
Though your words were meant to encourage and they do; what the hell do you really think?
Truth to power!
J_Gocht on March 24, 2008 at 5:09 PM
I think that people in today’s society has a rosy colored glass view of the totally free markets. A totally free market will given time result in the super rich and super poor. It will destroy the middleclass as those that gain wealth use the proceeds to increase their wealth at the expense of those that have lost wealth. IN a total free market you have emotions ruling above reason. In short you have the law of the jungle. During the total free markets of the past before governmental oversight we had many many booms and busts. the busts wiped out entire generations of welthy, we had salvery which destroyed entire societies and still to this day causes societial problems. I as an educated man do not wish to see my country go back to those days. I am happy with a market that is regulated enough so that the emotions do not rule the day. Too much intervention and regulation will destroy the spirit but not enough will destroy society as we know it. Governmental intervention to save the entire system is fine, governmental intervention to win votes is not.
unseen on March 24, 2008 at 10:09 PM
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