A Conspiracy Directed By The Fed

Posted by on . 14 comments.

(1)
A funny thing is happening to that offer that JPMorgan made a week ago to take over Bear Stearns.

Battered down by news of serious financial problems, Bear Stearns’ shares had closed at $30 the previous Friday, when JPMorgan Chase — whom no one should mistake for an old-fashioned robber baron bank — not only offered to buy the company for the piddly amount of $2 a share, but persuaded the board of Bear Stearns to support their bid. (The shares were trading in the high fifties just four days earlier. At the end of 2007, the market price was $88.)

A couple of shareholders, for some reason, were outraged. Outraged enough to threaten to file lawsuits to block the takeover.

(The market, by the way, didn’t for a moment believe that the $2 per share offer was going to succeed. Bear Stearn’s shares closed at $4.81 the day JPMorgan’s offer was announced, and ended the week at $5.96. Obviously, the market believed last week that Bear Stearns was not going to be taken over for anything like $2 a share.)

So, this weekend, JPMorgan looked deep into its corporate heart, and found that it had indeed undervalued Bear Stearns a teensy weensy bit.

Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share — a figure that represented a mere one-fifteenth of Bear’s going market price.

They just quintupled the price? Just like that? That’s quite a “Ha-ha-ha! Oops!” The one thing it does establish beyond the shadow of a doubt is that the original $2 offer was some serious low-balling.

It will be interesting to see what the market makes of this revised offer, whether Bear Stearns trades around $10 today, or higher (or lower; see below). Anyone can play, even from home. The ticker symbol is BSC. Any number of internet billionaires can be ordered to drop everything and fetch you Bear Stearns’ market price right away.

(2)
It’s also funny how that low-ball offer was arrived at. Apparently, Bear Stearns and JPMorgan are not exactly being allowed to conduct bilateral negotiations on this takeover. The Fed is in it up to its eyeballs. And the Fed dictated the $2 price.:

…the original fire-sale deal (was) struck only a week ago at the behest of the Federal Reserve and Treasury Department.
[...]
The Fed, which must approve any new deal, was balking at the new offer price on Sunday night after several days of frantic, secret negotiations, these people said. As a result, it was still possible the renegotiated deal might be postponed or collapse entirely…
[...]
The central bank also directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued, according to people involved in the negotiations.

It’s one thing for the Fed to balk at company X paying too high a price for company Y because it might threaten the financial solvency of company X. But, in the first place, that doesn’t seem to be relevant here, since JPMorgan is paying in stock and not in cash. Overpayment involves issuing too many new shares to Bear Stearn’s stockholders. That doesn’t threaten insolvency; it just dilutes the wealth of JPMorgan stockholders.

And over and above that, it’s clear that the Fed is tampering with the price that stockholders of Bear Stearns receive from JPMorgan for political reasons that have nothing at all to do with exercising prudent oversight of major financial transactions. That’s just obscene. Illegal too, of course, but that never stopped the Bush administration before.

The stockholders and employees of Enron were robbed by Enron’s board. The stockholders and employees of Bear Stearns are being robbed by JPMorgan in a conspiracy directed by the Fed. In effect, JPMorgan is being ordered to rob the stockholders of Bear Stearns, and the board of Bear Stearns is being ordered to stand by and do nothing but cheer the robbery on.

(3)
The board of Bear Stearns, meanwhile, is also starting to skate on some extremely thin legal-ethical ice:

In an unusual move, Bear’s board was seeking to authorize the sale of 39.5 percent of the firm to JPMorgan in an effort to move closer to majority shareholder approval. Under state law in Delaware, where the companies are incorporated, a company can sell up to 40 percent without shareholder approval.

Under state law in Delaware, the board of directors also has a “duty of care” and a “duty of loyalty” to its stockholders. To first support a low-ball takeover and to then conduct a thinly disguised end-run around stockholders’ expressed intent to oppose that low-ball takeover could almost be presented as a textbook definition of working against the interests of stockholders. As such, Bear Stearns’ directors are exposing themselves to a very real risk of lawsuits that they might well lose.

Of course, it is entirely possible that the Bush regime will press for retroactive immunity for the directors of Bear Stearns and JPMorgan, so that they are protected from any and all lawsuits resulting from this transaction. That would seem to be the Bush regime style in such matters: first “force” companies to do illegal things, and then protect them for the legal consequences of these illegal actions carried out at the behest of the government.

*** Update, 7:29 am ***

At 10:07 Eastern, Bear Stearns was at $10.67. In the first 37 minutes of trading, the high was $10.77 and the low was $9.80.

Clearly, the market is betting the final price will be more than $10.

*** Update #2, 8:21 am ***

JPMorgan’s higher offer has apparently been blessed by the Fed:

JPMorgan Chase raised its offer for Bear Stearns, the beleaguered investment bank, to $10 a share Monday morning in an effort to pacify angry Bear shareholders.

The offer is now valued at $1,180 million as opposed to the original $236 million.

Interestingly, JP Morgan found itself able to sweeten the offer by $944 million even as the Fed decided to modify its previous $30 billion guarantee to make JP Morgan liable for the first $1 billion in losses. Previously, the Fed had agreed to absorb the full loss if the value of a portfolio of Bear Stearns’ “most toxic assets” fell below $30 billion. Now, JP Morgan absorbs the first $1 billion, and the Fed guarantee kicks in only if the portfolio’s value declines below $29 billion.

The NYT reminds us that Jamie Dimon, chief executive of JPMorgan, said last week:

I feel terrible sometimes when people think we took advantage.

Maybe he felt so terrible because it was 100% true?

Also, the NYT reports that issuing new shares to give JPMorgan 39.5% of Bear Stearns’ common stock is also a done deal:

In addition, JPMorgan Chase will buy 95 million newly issued shares of Bear Stearns common stock, or 39.5 percent of the outstanding Bear Stearns common stock after giving effect to the issuance, at $10 a share.

(See also “The Shotgun Wedding Arranged By The Fed“)

Comments

  1. cactus says:
    March 24, 2008 at 7:35 am

    The fact that the offer went up doesn’t mean that BS is worth $10 a share, or even $2 a share. If the assets they have are ones that nobody will touch, they have a zero or negative value.

    The fact is, JPM isn’t paying for this buy-out, the Fed is by guaranteeing JPM that they won’t lose money. (I wish they had made me the same offer. Heck, I’d buy CountryWide with a guarantee like that, and I could find people to put up the cash with a guarantee like that.)

    Apparently $2 per share is not enough of a gift from the Fed to people who still refuse to believe that their collection of squirrel carcasses have no value.

  2. sarabeth says:
    March 24, 2008 at 7:41 am

    maybe your BS isn’t worth 2c either?

  3. 42 says:
    March 24, 2008 at 9:35 am

    The Fed bail-out is illegal. JPM got a $30 billion put option on BSC’s assets for free from the Fed.

    http://financialpetition.org/petition-impeach.shtml

  4. sarabeth says:
    March 24, 2008 at 10:05 am

    They got a put option with a strike price of $30 billion (now revised to $29 billion).

    The real question is: what’s the value of the option? That’s the real gift Hank Paulson gave JPM on our behalf.

    It’s obscene, but unfortunately it’s not illegal. (And even if it were, would that matter in the time of Bush?)

  5. tom says:
    March 24, 2008 at 10:26 am

    doesn’t the real value of BS rely on exactly how much of a loss their total assets are worth? that really isn’t going to be readily apparent until we hit rock bottom with the housing market, which is why even at a sweet $2 a share it wouldn’t necessarily make sense to take on that possibility without the Fed guarantee. the fact that BS could essentially be a $30B loss for JP Morgan is why it is a bail out, they’re taking a chance that otherwise isn’t a logical one. why take on a company that could net you a gigantic loss if things go as poorly as they could?

  6. sarabeth says:
    March 24, 2008 at 10:53 am

    why take on a company that could net you a gigantic loss if things go as poorly as they could?

    Every single stock you can buy in the market would net you a huge loss if things go as poorly as they could. That’s why stocks are a risky investment.

    Investors, of course, are perfectly willing to make such risky investments all the time. And that includes widows and orphans and housewives and what have you.

    The fact that your assets might go down in value tomorrow — maybe a lot — doesn’t stop them from having a real and meaningful value today.

    So even Bear Stearns’ stock has a real, meaningful value today. At some price they are fairly valued; at a much lower price they are grossly undervalued. It is clear that $2 a share constituted gross undervaluation. For the Fed to conspire to have Bear Stearns bought out at $2 a share is an unconscionable act of economic skullduggery.

  7. TO says:
    March 24, 2008 at 6:14 pm

    #

    sarabeth wrote:

    maybe your BS isn’t worth 2c either?

    Posted 24 Mar 2008 at 7:41 am ¶

    That’s deep.

  8. Dave K says:
    March 30, 2008 at 2:26 pm

    “The stockholders and employees of Bear Stearns are being robbed by JPMorgan in a conspiracy directed by the Fed”

    BSC was about to declare bankruptcy… IRT shareholders, “Anything” is better than “zero” don’t you think? The original $2 price was a simple placeholder to show that the company was not going to be allowed to go bankrupt. It was to prevent what would have been “a very bad” reaction to a Monday announcement of “BSC is bankrupt”… The $2 placeholder provided JMP more time to get into the books further and come back with a “better” (based on individual interpretation) offer. Again, anything was better than having an announcement that “Bear Stearns is bankrupt”…

    It’s far from the conspiracy being portrayed here; it was a measure taken to avoid a mkt collapse and resultant collapse in U.S. sentiment (even lower than it currently is). Did we really want people frantically withdrawing their money and causing further damage to our economy? Is there corruption in the world? Obviously the answer is yes but there are far less conspiracies than you imply…

  9. Jimmy says:
    March 30, 2008 at 4:56 pm

    #8
    Those are some great points Dave. I agree that the media blitz regarding a BSC bankruptcy would have scared a ton of people. I was a little nervous just hearing about the “possibility” of a major financial institution like that going bankrupt. It’s like the fed rate cuts that have brought us to 2.25 percent; the Fed basically picked the lesser of two evils by reducing rates (to salvage the collapsing economy) and letting the dollar and inflation suffer. In BSC’s case it was the evil of a market collapse vs. the evil of a bailout. The bailout was obviously the better choice. I’d rather be at 6% fed funds but it just wasn’t possible because then we’d “really” be seeing bankruptcies and bailouts. I also agree with the concept that there is corruption and conspiracy in the world but, unfortunately, that will never change.

    Speaking of conspiracies, I’m feeling a sense of The Manchurian Candidate in the current Presidential race; all the unquestioning followers that base their support on speeches alone.

  10. sarabeth says:
    March 30, 2008 at 5:57 pm

    “It was necessary for the Fed to prevent a Bear Stearns bankruptcy” and “It makes sense for the Fed to direct JPMorgan to pay no more than $2 a share to Bear Stearns stockholders” are very different statements. Poles apart, one might say.

  11. Jimmy says:
    March 30, 2008 at 11:14 pm

    #10
    I don’t see where I ever said they were the same. I was simply agreeing with another person’s comment about why it was a necessary action and how the shareholders are definitely better off getting anything ($2, $10, whatever) than they would have been with “zero” if bankruptcy had been allowed to occur. Therefore the stockholders aren’t getting robbed if they get something greater than “zero”.

  12. sarabeth says:
    March 31, 2008 at 4:03 am

    Anyone who thinks stockholders typically get zero if a firm declares bankruptcy, a) has very little idea how the process of bankruptcy works in practice, b) somehow managed to miss all the Bear Stearns stories which pointed out how many large stockholders thought they would probably walk away with much more than $2 in bankruptcy.

  13. Jimmy says:
    March 31, 2008 at 6:30 pm

    “Anyone who thinks stockholders typically get zero if a firm declares bankruptcy”

    I believe we were talking about common shareholders (at least I was). Holders of BSC-PX, BSC-PE, BSC-PG, BSC-PF, as well as other bond holders and creditors will always be better off than common shareholders. Also, since the bankruptcy did not occur we don’t know exactly what people would have received.

  14. sarabeth says:
    April 1, 2008 at 3:35 am

    I believe we were talking about common shareholders (at least I was).

    Yes, me too. I’m talking about how bankruptcy typically works in practice (as opposed to theory) for holders of common stock. How bankruptcy judges don’t actually implement “absolute priority”.

    Also, since the bankruptcy did not occur we don’t know exactly what people would have received.

    Funny how that didn’t stop you before when you confidently declared (in #10) that stockholders of Bear Stearns would have received zero if bankruptcy had been allowed to occur. Now, when you’re challenged, you hide behind this absurd “how can we ever know”.

    Holders of BSC-PX, BSC-PE, BSC-PG, BSC-PF, as well as other bond holders and creditors will always be better off than common shareholders.

    Yes, but that’s not the point.

    You’re just playing absurdly dishonest games…