Bankruptcy

Loaded for Bear?

By Adam Levitin

Last week, JPMorgan was going to pay $2/share for Bear, Stearns, with any loss absorbed by the Fed (and thus by taxpayers). Now JPMorgan is going to pay $10/share.

This new offer shows what a lowball offer $2/share was. The offer just jumped 500%! This should make one question whether $10/share is still a lowball. Can we expect the current process to produce a fair market price for Bear? Shouldn't we at least have some sort of an auction? Perhaps that already happened informally before the JPM bid came out, but now that the initial panic has subsided, maybe it's time to have a more formal and orderly auction. In light of the apparent drafting snafu in the original offer that has JPM on the hook for all of Bear's trades, regardless of whether the deal is consummated, I have to think the Bear Stearns board might have a duty to shop for other offers. I assume that the Fed would offer its guarantee to anyone who could top the JPM offer.

Regardless of whether JPM pays $2 or $10/share to eat Bear, I'm still puzzled why the Fed didn't guarantee BS directly or buy it out itself? Why would the Fed take the downside risk, but not also the upside? I'm not familiar with the Fed's enabling statute--perhaps there is a legal impediment. But even if not, I doubt that the Fed wants to own BS itself--it's one thing to hold some mortgage backed securities, it's another thing to have a 100% stake in a major investment bank, even for a short period. Still, it's one thing to bail out Bear Stearns. It's another to hand JPM (or anyone else) a windfall that should rightfully be the taxpayers'.

Full post as published by Credit Slips on March 24, 2008 (boomark / email).