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Photograph of Bear Stearns by Mark Lennihan/AP
The NY Times reports "JPMorgan Chase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns...in an effort to pacify angry Bear shareholders." Over a week ago, JP Morgan had agreed to pay $2/share for Bear Stearns stock, for a total payout of $236 million, but the new talks would raise the price to $10/share, making it a billion-dollar deal.
Bear Stearns' stock had been valued $30/share before the buyout, sending financial markets and Bear employees who own about 30% of the stock into considerable turmoil last week (the Fed also cut rates to soothe the market). The Federal Reserve had backed the $2/share buyout plan and also agreed to give JP Morgan $30 billion loan.
According to the Times, the Fed, which wants the $2/share plan to proceed so it doesn't look like a government bailout, was "balking at the new offer price" and it's "still possible the renegotiated deal might be postponed or collapse entirely." Bear's board is also looking to sell JP Morgan 39.5% of the company (the board does not need shareholder approval for sales under 40%), while some shareholders have thought about sending the firm into bankruptcy, possibly getting more than $2/share from creditors.
NY Magazine has a feature on the Bear Stearns collapse, plus An Idiot's Guide to Financial Crises. Also interesting: Bear Stearns executives unloaded $20 million in stock last December.
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I love how if you're in finance and you fail, you get special treatment. Maybe if there was real risk for these companies they might not have been so lax in recent years.
Large investment banks get special treatment in situations like this so there isn't a national and worldwide financial panic. We dodged that bullet last week.
From 2 to 10 bucks a share? I wouldn't even call that much of a bailout.
Considering JPMorgan brought the company with its liabilities backed by the Fed, they should be paying A LOT more then $10/share. It’s not so much about special treatment than it is about getting a fair deal.
Many Bear Sterns investors are actually employees who wrapped up their life savings/retirement entirely in company stock. I do feel a little sorry for them, as stupid as they are for not diversifying their wealth.
I thought some payroll stock options had selling restrictions. It's possible that their portfolios weren't able to be diversified.
I love how if you're in America and you fail, you get special treatment. Everything from welfare to medicare to social security to bailouts for homeowners in disaster-prone areas without insurance to the inevitable socialized healthcare system. Singling out corporations as unique beneficiaries of this bullshit is hypocritical.
What bothers me most about this deal is the government's role in sealing the $2 per share buyout to begin with. Why would the government choose sides in a deal, when others who likely would have paid more for Bear Stearns (J.C. Flowers and KKR) were also interested in buying? The whole deal stinks. Bear Stearns shareholders would be right to reject these low offers.
its awful America is bailing out an bazilliondollar investment bank but perhaps the public doesn't realize the great macroeconomic repercussions of this firm going under...still though...i think everything defaulting on their student loans will be the next crisis!
I'm not saying what the Fed is doing is "right" but the EU has long bailed out its farmers and mega-companies such as Airbus on numerous occasions.
Just sayin
I'm not sure anyone seems to understand the possible ripple consequences of the fed not bailing out Bear Stearns.
What would the ripple consequences be andoman. Please enlighten us.
andoman is right.
There is a general loss of confidence in the system as there is plenty of bad debt floating around but no one knows exactly where it is, thanks to the tight securitization of those Sub-Prime mortgages everyone's talking about. Bear Stern's fell because of a loss of confidence in how much liquidity it had available. And due to its tight integration with the rest of the economy as well as other Investment banks, it can cause these fears to spread out to other banks as well.
What the Fed did was wise. It showed that it was willing to step in to save Investment Banks, banks that they don't usually step in to save, thus helping investor confidence in the system as a whole and preventing a wider rout.
Theres a common misconception that whats happening with the investment banks has nothing to do with our everyday lives but that is very incorrect. Guess who helps finance our mortgages, stock purchases, corporate finances, etc etc etc. Yep, its those pesky investment banks! The system simply would not run without them.
The system wouldn't run with a lot of things. If investment banks are to be immune from failure even while doing all the insane things they do to generate money, then they will forever hold us hostage while we absolve them of any consequences.
FYI, I work in securitization at a global firm and have seen the ranks get decimated recently. Every time the government interferes the ripples guarantee there will be further interference required down the line. Pay welfare and you create a welfare society. I'm against bailouts of failures, corporate or individual.
So in that case do you recommend more government oversight of the industry? It seems as if every time the SEC puts down the law, companies complain about the red tape stifling business and about how foreign companies will run to other exchanges & markets.
I think the current administration had a part to play in this mess. Their love of letting the free market decide where things go with little government oversight helped create an environment that can breed these types of problems in the first place. I'm not saying they are the root of the problem, but it sure helped.
Not government oversight, just no government interference. Let people and businesses face consequences and you can be sure Darwinism, market forces, and fear of those same consequences will take care of the rest.
the ripples would have been with repo and derivatives (ir and cds) counterparties, and likely would have brought many other people down with them. to most people in the US, right now the market problems are just something to read about...had this happened, it would have been something more people were actually experiencing.
Good points by Kojak, JDSX and chrisk, even as they don't all agree, but the question remains: with so much at stake to the economy as a whole because of the breadth and depth of the investments involved, then considering the "ripples" that would have turned into waves, when does it become prudent for some regulatory body to DEMAND more transparency as to where all this capital has been placed, what the risks are to it, and if there are any emergency brakes should it start to unwind? Otherwise, might we not just bide our time until the next near-disaster, accompanied by a mega-bailout, in ten years or so, or as long as it takes for "the market" to forget the last LTCM, or the last Bear, or what have you?
What ripples, Chris? What happens if the counterparty in a swap is unable to fulfill the contract? What exactly was going to happen to Bear Stearns if JP Morgan/Fed hadn't stepped in?
Why do we need to regulate? Failure regulates itself. What we really need to regulate and diminish is the Fed; that's the biggest source of trouble.