March 24, 2008
JP Morgan stretches the Fed’s authority
Hmm. Well, we have now seen the terms of the JP Morgan’s revised $10 a share offer for Bear Stearns and I do not think it is a good outcome for the Federal Reserve.
The Fed does gain something from the new deal - JP Morgan takes on liability for the first $1bn of losses from the $30bn portfolio of illiquid assets that it guaranteed as part of the first agreement.
In return, however, it is allowing Bear shareholders to get five times the original price for an investment bank that was in effect insolvent 10 days ago without the backing of the taxpayer.
We have moved an awfully long way from 1998, when the New York Fed was criticised for simply calling a meeting of Wall Street banks to organise an attempted rescue of the hedge fund Long-Term Capital Management.
This time, the Fed has not only committed public money but has allowed the deal to be renegotiated in a way that grants Bear’s shareholders a bigger reward.
The Fed can argue that the structure of the new deal is in some ways preferable and the Bear shareholders still get relatively little for their equity. From that point of view, the Fed has minimised moral hazard while keeping Bear afloat.
The fact remains that it has been dragged into a public fight involving JP Morgan and Bear shareholders and has had to accept a further compromise. That cannot be a good thing for its authority.
Let us be clear that the JP Morgan and Bear Stearns deal is an attempt to save the Bear Stearns using the power of the US government and Federal Reserve instead of market power, therefore the long term outcome of transaction may have a very negative impact on the US economy. By doing so Federal Reserve demonstrates the double face position in relation to the market players. This is the beginning of the end, which may lead to the state of collapse in US economy in 2008.
Posted by: Viktor O. Ledenyov | March 24th, 2008 at 5:18 pm | Report this commentNew York certainly is producing some of the most confusing news these days. This decision by Morgan to pay a record 5-more-than-it-had-to for BSC leads the list. JPM had BSC over a barrell, they were whipped, the referee had called it a match, and bets were being paid off. Maybe it makes sense for the suits in New York, but the political fallout in Washington is going to be severe. The basic question I have is if JPM is rolling in so much cash it can afford to give almost bankrupted stockholders of BSC such a generous handout, then why in hell do they need the $30 billion in taxpayer bailout via Fed assistance? BSC employees got $16.5 billion in Christmas benefits, and now it looks like they got another $10 billion as an Easter gift, too.
Posted by: edward allen | March 24th, 2008 at 8:07 pm | Report this commentNew week, and new estimates of the worth of the Bear Stearns NY headquarters building. On the PBS News Hour tonight (Monday), Andrew Ross Sorkin of the NYTimes says some put it at $2 billion. I noted here last week it went from $800 million to $1 billion, $1.2 billion, and then $1.5 billion last week, depending on the source, Gee, doubling in a week. That really must be some bubble in NY commercial real estate.
Posted by: edward allen | March 24th, 2008 at 11:57 pm | Report this comment“Bear Stearns’s current owners will receive $1.5 billion of JPMorgan stock”
now that
“the Fed will assume the risk of loss on the remaining $29 billion”
“that the firm had valued”
(Bloomberg)
so I guess the Fed has authority to loot the public treasury.
Posted by: MoreMonopolyMoney | March 25th, 2008 at 2:18 am | Report this commentThe claim that the deal brokered by the Fed and US Treasury was in the nature of LTCM bailout has lacked credibility. The attempt, in fact, was not to provide temporary succour (liquidity) to Bear but to hand over its corpse to JP Morgan. It was hit upon as a ‘novel’ arrangement. JP Morgan used its clout to the hilt and beat the share down to $2. Faced with a furore from shareholders and the public, it is repricing the shares. If there is justification for such a revison, what was the role of the Fed or Treasury? Why did they agree to $2 per share?
We are tired of hearing orguments over ‘moral hazard’ created by bailouts. But the Fed has lost its neutrality and credibility by lending its name to the deal.Its hands are tainted and not all the perfumes of Arabia…The irony is that when meek professors wish to create history and engage in heroics to save the system, they end up with newer types of hazards.
Posted by: K. Subramanian | March 25th, 2008 at 6:50 am | Report this commentThe deal brokered by the Fed and the US Treasury lacked credibility from day one. By no test was it comparable to the lTCM deal of 1998. LTCM was plain vanila and sought to provide bank credit to save large value swaps and was a one-time affair. Bear/JP Morgan alliance was not an attempt to provide liquidity. It was an attempt to hand over a sacrificial goat (corpse, rather)to JP Morgan. JP Morgan used its clout and beat the share price down to $2. Facing furore from shareholders and the public, JPM is now quintupling its offer. If ab initio the deal had been well thought out, why did the Fed agree to $2. By lending its name to the deal, the Fed had tainted its hands and not all the perfumes of Arabia…..
We are tired of hearing the ‘moral hazard’ arguments of monetarists. When meek professors wish to create history and engage in heroics to save the sytem, they create newer hazards.
Posted by: K. Subramanian | March 25th, 2008 at 7:10 am | Report this comment