Raise the Price

I really don’t see how Bear shareholders will approve the $2 deal. Apparently, I’m not alone. The stock is currently at $6 and it went as high as $8 yesterday.
Part of that the buying is being driven by BSC creditors (hedge funds, mainly) who don’t mind taking a small equity loss in exchange for a big debt gain—they just want the deal done. No one knows how much equity Bear truly has, but there’s around $300 billion of Bear Stearns bonds out there. If the whole mess goes to a bankruptcy court, then the stock holders go to the back of the line.
Of course, the debtor’s strategy could backfire if the price goes too high and JPM gets cold feet. Still, I doubt that would happen. As always, one shouldn’t fight the Fed.
I would say that the most likely outcome is that JP Morgan will sweeten the offer. To add some context, it’s really not that much for them. The company’s market value has already increased by $20 billion this week. The offer for Bear will cost them $236 million. What’s the big deal if they double or even triple it? Plus, it could win them some goodwill. Dimon is a very smart guy, and it might be a shrewd move to get out in front of what could become very unpleasant. If I were him, I’d meet with Joe Lewis, Legg Mason and other major BSC holders. He’s already won big. He can afford to be magnanimous.
On top of that, let’s not forget that JPM owns a gigantic call contract of whenever-$2s, and there’s also the building deal. Plus, it’s not unreasonable for the U.S. credit market to recover over the next few weeks. That could be a huge boon for BSC’s debt. To quote Michael Scott, it’s win-win-win. In fact, taxpayers could win as well.
I think we ought to move beyond the question of whether the Fed should be involved in—what I’ll call—a quasi-bailout. Instead, let’s look at the deal that was made, and it makes JPM look Putin-esque. The WSJ reminds us that it’s not uncommon for the government to make money off bailouts:

During the 1995 peso crisis, the Clinton administration offered Mexico $20 billion in loans, with the country’s oil revenues as security. The International Monetary Fund offered another $18 billion. Critics condemned the loans as a bailout. In the end, Mexico didn’t require the entire amount, and the country’s finances recovered. The U.S. ended up making a profit on the interest payments.
The government also turned a profit from the Air Transportation Stabilization Board, an entity set up after the Sept. 11 attacks to support the airline industry. The board ultimately provided a total of $1.56 billion in loan guarantees to six carriers. The government earned just under $350 million from fees and stock sales, according to the Treasury Department.

Last year, the Fed made a profit of $34 billion. It’s very possible that the central bank could make money on whatever they’ll get from Bear’s book. I still don’t understand who gets what. This seems to be a classic case of we don’t know what we don’t know. Perhaps the best move for the Fed is to hold the bonds to maturity.

Posted by on March 19th, 2008 at 8:08 am


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