JP Morgan sweetens the deal

I am of two minds at the news that JP Morgan has raised its bid for Bear Stearns from $2 a share to $10 a share.

On the one hand, it will help the deal go through, putting JP Morgan's balance sheet behind all of Bear's trade, which should go a long way to settle the markets. And the Fed leaned pretty heavily on Bear Stearns management to make a sweetheart deal to entice JPM in; that's not exactly fair.

On the other hand, failure should hurt; otherwise, the moral hazard problem is too great. And raising the price from $2 to $10 inches the needle a lot closer to "bailout".

Comments

Megan,

Look at this way: if the Fed's newest loan facility were made available a week earlier, Bear wouldn't have had to find a suitor so fast (if at all), and would probably have gotten a bid for more than $10 per share. Still, losing 90% of your equity in a few months sounds painful enough to me.

Posted by Fred | March 24, 2008 2:10 PM

Overlawyered.com had a post on a contract problem. JPM's new offer may be addressing that:

http://www.overlawyered.com/2008/03/the-dangers-of-doing-an-ma-agr.html

Rick

Posted by Rick Caird | March 24, 2008 2:49 PM

"On the other hand, failure should hurt; otherwise, the moral hazard problem is too great. And raising the price from $2 to $10 inches the needle a lot closer to "bailout"."--MM

then, what would your take be on this:

"Former Treasury Secretary Robert Rubin called for quick government action to tackle the rising level of home foreclosures and he indicated taxpayer money will have to be used.

"There is a strong need for urgent action," Rubin, who is chairman of Citigroup Inc.'s executive committee, said. "I would be very, very seriously considering the possibility of using public funds in one form or another."

The Federal Housing Administration should be involved in any stepped-up government effort to help homeowners facing the loss of their houses, Rubin said an interview on Bloomberg Television's "Political Capital with Al Hunt," to be aired today. "The piece that's missing now, at least in my judgment, is addressing all of these mortgages that face foreclosure."
http://globaleconomicanalysis.blogspot.com/2008/03/quiet-coup-towards-nationalization.html

Posted by MEH | March 24, 2008 2:54 PM

Megan,

I have to disagree. The "haircut" implicit in even $10 falls somewhere about the lower neck/upper chest area for anybody who was holding BSC prior to 3/14. I can't see anybody chomping at the bit to try and duplicate this performance, so "moral hazard" is a non-issue. What's the pitch? "Don't worry, if we lower our lending standards, the worst-case scenario is the equity gets cut by only two-thirds in a couple of years"? Long-term Ibank management incentive structures are another matter, but I don't think a BSC haircut of 100% would change that in the least.

In any case, this was simply a matter of the remaining BSC shareholders having enough power to kill the deal and very little incentive, at $2, not to risk it.

Posted by Bernard Guerrero | March 24, 2008 2:55 PM

It appears that the Fed applied a lot of coercive convincing to make the deal work, including setting the original price to be contradictorily far less than the actual worth of the company. It would appear that the "correct Libertarian" response would be that this is better because it's a situation where the markets have forced on the government and JPM a valuation more in likne with the market.

Posted by Charlie (Colorado) | March 24, 2008 4:57 PM

Without the now-$29bn that the Fed is still putting in, would the deal have gone through? If the answer is "no", then a deal at $10 is for sure worse than a deal at $2 from the perspective of moral hazard and the gov intervening in the markets. The taxpayer gets essentially as much risk as before, but the government action looks more like a bailout... And after these moral hazard/bailout issues, the actual $8 per share difference is nothing but a transfer between two private parties, so what do we care?

Now, if the deal had gone ahead without the $30 bn from the Fed, whether at $2 or $10, then scream "arbitrage" and claim it would have gone ahead just the same and the Fed's action are nothing but a gift to JP Morgan (and to BS shareholders only if bankruptcy would have meant getting less than $2 per share, which was precisely why the Fed and Treasury insisted, quite rightly, to keep the share price down).

Which leads me to the blasphemous: If the Fed was sure BS was going down and that the contagion would have made the bankruptcy procedure too unbearable for the markets as they are, why not intervene directly? Take over it and break it down in an orderly fashion like it's done with a deposit-taking bank gone sour. Why give such love to JP Morgan?

And what would have happened if JP's lawyers hadn't messed so bad the contract? Would JP still be stonewalling at $2?

Posted by ram | March 24, 2008 5:20 PM

As an aside, has anyone mentioned that JPM-Chase gets the Bear Stearns building no matter how the rest of the deal goes down?

Posted by raptros-v76 | March 25, 2008 6:59 AM

they basically just ponied up for the building.

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Posted by xhovzim mwgol | July 12, 2008 12:11 AM