Monday, March 24, 2008

$2 - No more no less

Rumor is JP Morgan is thinking about upping the ante on the Bear Stearns deal to help it go through. The Fed should discourage this.

The original sale price of Bear was $2 a share and represented a virtual wipe out of Bear shareholders. Given the extensive role the Fed played in staving off bankruptcy this was appropriate. The Fed should in no way signal that it is prepared to step in to save stockholders. It should step in only to assure smooth functioning of credit markets.

However, now JP Morgan seems to be caving from pressure from Bear shareholders who may vote down the deal out of spite. The Fed cannot stop this directly but it can issue statements which imply its approval of the $2 price.

I would say something like:


The funding and guarantees offered by the Fed were supported by JP Morgan's unique ability to provide stable assurances to Bear Stearn's clients, creditors and counterparties. We anticipate that few other situations could have or will justify such measures.
In other words, Bear shareholders are lucky to have $2. Please do not make things worse than they already are.

14 comments:

Independent George said...

Isn't the Fed acting as a insurer of Bear's assets? Can't the Fed make its support conditional on the terms of the original deal?

As far as I can tell, Bear's only alternative is to wait it out for a couple years in bankruptcy court (which, as you said, is useful only for the sake of spite).

Independent George said...

Actually, I thought of an even better idea.

I decided to search eBay for Bear Stearns stock certificates. A 100-share certificate is currently selling for $36.

$3.60/share seems like a fair counteroffer to me.

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