Bear Stearns and JP Morgan

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.

Was there a case in Japan where a failing institution got sold to another for fire sale prices? This seems a bit more punishment than a simple bailout.

Well, thank Heaven they aren’t going to interfere with the magic of the Free Market!


Lee Iacocca, several agribusiness tycoons and a bunch of former S&L presidents said the same thing to me at the club this morning.

PDF of conference call

One of the first questions asked is, “what if the shareholders don’t approve this deal?”

In bankruptcy, which apparently Bear Stearns was on the brink of, stocks are worth at most pennies. Two dollars would be a fortune compared to that. So why would stockholders not approve?

Recalibrate your sarcasm meter.

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.

I think it’s open for debate how “on the brink” they were, and what kind of probability you assign to that can radically alter what you think is a good deal.

Supposedly book value per share of BS is like $80, and they’re getting it for $2. That’s a lot of wiggle room.

They address that in the conference call PDF, too.

Some think that they would get more in liquidation. A quote from the wall street journal

and he might be right. BS can’t meet it’s obligations today, but who’s to say they couldn’t meet their obligations, and then some, after selling off all of their assets?

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.

Morgenson tore them a new one. . .

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.

NPR stated that the HQ was worth an estimated $1 billion.

I’ve read different things. I don’t just mean different from you.

If everyone had the exact same valuations, there would never be any transactions.

I mean, if their stockholders are “lucky” to be receiving $2 a share, then why is JP Morgan paying it?

But, maybe it is generous. It’s very hard to tell right now.

The market reaction to the current deal doesn’t inspire much confidence; how much worse could it be if BS had simply filed for bankruptcy?

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.

Also. . .SFW

I bet the Jersey City one is worth quite a bit, too.