Sunday, March 16, 2008
A squeaker
It has been an all-Bear Stearns weekend for yours truly, for reasons I cannot describe. However, the real story is the price:
Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns's ``less-liquid assets.''
That $30B facility is a big deal. The financing is in excess of the stated value of all of Bear's "Level III" assets and was provided on a "non-recourse basis" (as JPM said in the conference call).
Basically, JPM is being paid to take on BSC's balance sheet. Nobody wants another $200+ billion of the stuff everyone's trying to sell, so that makes sense. You'll hear all sorts of commentary about how the building is worth $1.2 billion blahblahblah. The real problem is that the market fluctuation of BSC's inventory can easily wipe out the book equity and then some, and its franchise is horribly damaged. The rumours about $2 to $4 billion price floated during the afternoon were nonsense.
Those of you who were worried about the fatcats being bailed out - no more worries. Jim Cayne's Bear stake was over $1 billion not too long ago. Now it's all gone, with lawsuits to follow. Those were some expensive Bridge tournaments. There's still a remote chance that the holders of billions of parent company debt, which JPM took pains to say it won't guarantee, could suffer some more heartburn, since the merger is set to close after billions mature in the coming weeks.
It sounds like this one got done by the skin of Ben's teeth. The markets seem to know it, because the reaction is negative so far in Asia.
5 Comments:
By 
TigerHawk, at
Mon Mar 17, 06:49:00 AM:
It seems like a creative deal by the Fed. Has it ever provided a facility like this in connection with a merger?
One thing is for sure -- there is a lot of re-regulation in the future of the financial services industry if the Democrats win the White House, and maybe even if they don't. It will be painful for everybody, including especially people who want to raise capital.
By 
, at
Mon Mar 17, 07:09:00 AM:
Well hell, TH, first toss all these guys in prison, after disgorging their assets. This is the most disgusting of melt downs, but the cockiest firm with super high paid 'talent'. Ultimately, the taxpayer is paying the price.
Where does Sarbox enter the picture here?
By TigerHawk, at
Mon Mar 17, 07:46:00 AM:
Well, the good news is that the deal essentially wipes out the equity, so the super high paid "talent" is not getting bailed out to any meaningful extent. And JP Morgan already has an investment banking division -- a very good one -- so I'm guessing that Bear employees will come out on the losing end of any "integration." Expect the prices of Manhattan coops to decline now.
The Sarbox question is a good one. I suspect that Bear had excellent "internal controls," which sort of makes my point: Sarbox regulates process at enormous cost, and misses the important stuff.
By , at
Mon Mar 17, 09:58:00 AM:
Bush just said in a press conf. moments ago that the "capital markets are functioning efficiently and effectively." Who's he kidding?
If the capital markets were functioning efficiently the Fed wouldn't have had to step in with a bailout.
By , at
Mon Mar 17, 10:16:00 AM:
My truck runs effectively and efficiently, but I still have to change the oil once in a while, replace brake pads, and tires still blow if I hit a nail in the road.
It doesn't mean 'perfectly.' Nothing works that well.
Except, of course, Cuban health care.
