March 24, 2008
Why the Fed should not subsidise a higher Bear offer
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?
[…] que mude, caso contrário o Fed terá feito um papelão, criando um problema enorme de risco moral (John Gapper, Yves […]
Posted by: Oferta cinco vezes melhor « Notícias do mercado | March 24th, 2008 at 2:03 pm | Report this commentEuro am Sonntag (a new mag from Springer-Verlag) reports online that the offer (in JP Morgan stock) is upped from 0,05473 to 0,21753. The Fed will stick to its original arrangement imo - to be seen to be haggling over a few of Milliarden would signal to the markets that the Fed is having to count every cent now
Odds on that the Fed will let this higher bid go through (it’s a done deal behind the scenes, imo).
Posted by: fh | March 24th, 2008 at 4:10 pm | Report this comment3 answers here:
The Fed: Complete nonsense for the Fed to continue to provide the ’same’ guarantee. They should reduce it. This way, they have performed their job as central bankers shoring up the system, but let individual shareholders take the hit for their failed risks.
JP M: they can pay whatever theu think is fair price, but then they cannot ask the Fed for the same guarantees. it is public money behind the guarantee, and it can come with demands.
As for the Bear Sterns’ employees who are crying, hey, you got yourselves into this hole. Where were the tears last year when you were getting those bonuses? If a start up / entrepreneur got the terms you did, they would be happy that someone even offered to save them from all the debt they would otherwise had on their hands when their business failed. Welcome to reality.
Posted by: Suresh | March 25th, 2008 at 1:08 am | Report this commentThis smacks of cronyism to me. I wonder what kind of political pressure Big Ben is receiving to roll over and let the new deal through. Anyone who thinks moral hazard and and public funds mean anything to the greedy sods running the US, need to review the recent war profiteering and doubling of our national debt. Our (mis)leaders are truly pigs at the trough.
Posted by: Bart | March 25th, 2008 at 3:26 pm | Report this comment$8 more a share.
As you say, the deal was $2 a share. I suppose JPM may want to tame Bear’s employees, Mr. Cayne, and Joe Lewis’s outrage.
Mr. Gapper I enjoy reading your articles in the paper.
Posted by: Bhavin P. Kapadia | March 31st, 2008 at 12:37 am | Report this comment