JP Morgan Chase is buying Bear Stearns for about $2/share, or about $236.2 million. Bear Stearns closing price last Friday (3-14) was about $30/share.
Apparently the feds have already approved the deal, as well as the federal reserve. It would even appear that JP Morgan is getting the Bear Stearns headquarters in Manhattan as part of the deal. I have to imagine that building and the dirt it’s built on is worth many multiples of the company’s selling price, which leads me to believe that Bear Stearns has much more bad debt on its books than has been led on to this point. The only way I can see this deal being beneficial for BS shareholders is that the stock would at some point in the near future be worth considerably less than $2/share.
My question is this: What happens if stockholders do not approve the deal?
Also, I noted this in the Yahoo article:
What law, if any, authorizes the Fed to guarantee these loans? Does it set a precedent for the other troubled investment banks or is the Fed free to pick and choose who they bail out?
The Fed loan sets an awful precedent. If we learned anything from Japan it should be that bailing out failing financial institutions is a poor policy. They failed as a direct result of foolish risk management and bad business decisions, it isn’t like there was a ‘run on the bank’. I can’t imagine the shareholders wouldn’t ratify the purchase. This makes it obvious that Bear Stearns would go under without Chase’s intervention.
As to your last question, the fed is a quasi-private institution, which I would assume gives them the latitude to make these decisions.
The point of luci’s post was that the same people who are such rugged individualists, opposed to all government intervention when it comes to regulation of business and financial practices, will immediately start begging on government’s front porch when it comes time to pay for their mistakes.
And Stearns, in particular, was notoriously cavalier.
The NYTimes article yesterday by Gretchen Morgenson indicated they tried to IPO this company last summer called “Everquest” which was basically going to be a company that held Bear’s shitty paper. Real cool guys, there.
Bear Stearns dumping all of its assets wouldn’t work all that well; they’d flood the market for a good percentage of their holding, and I’ll wager that they’d get less than 75% of current stock price for all of the assets they liquidate.
The stock market is pretty darned efficient, but BS dumping core on the market would result in very odd market behavior.
No, the Federal Reserve banks and their Board of Governors are public institutions, created by law, with powers and responsibilities defined by law. One of those powers is the power to guarantee loans with the full faith and credit of the United States federal government.
Haven’t read through the PDF yet but from all I have read, the stockholders are quite lucky to be receiving $2. per share. If they went the bankruptcy and liquidation route, the net worth is reported to be significantly in the minus.
Part of why the Fed and JP Morgan wanted to do this is that if BS dumps everything on the market, those assets become cheaper, and all those big banks own similar assets.
And, BS owes money to those other banks.
Anyway, that was one particular interpretation of why it is bad for BS to totally fail. Not that what is happening is much better. Funny line I read today was that the Yankees paid more for A-Rod than JPM paid for Stearns.