Is JP Morgan about to give in to Bear Stearns’ angry shareholders and offer five times its original $2 a share price?

So Andrew Ross Sorkin says in the New York Times this morning:

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.

I do not understand how the Federal Reserve can stand behind the deal on anything like the original terms if JP Morgan is going to pay more.

The original deal depended on the US taxpayer to prop up the most delicate part of Bear’s balance sheet - $30bn of illiquid securities that JP Morgan insisted the Fed stand behind before it took on the rest.

It may be in JP Morgan’s interests to pay more. The Bear employees are clearly angry and outraged and JP Morgan might be able to calm them down a bit by offering $10. However, it is relying on the Fed not losing patience.

Remember that it was Bear that called the Fed for help on Thursday evening 10 days ago because it believed that it was about to become insolvent. If the Fed had not stepped in with public money, the shares would now be worthless.

I see no reason why the Fed should subsidise a better deal for Bear shareholders. If any deal at $10 a share includes any substantial Fed guarantee, how can it argue that it has avoided moral hazard?

March 24, 2008 1:40pm in Finance | Comment