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Roger Ehrenberg of Information Arbitrage Mar 24, 2008 Email this article to a Friend  Printer friendly page

Total capitulation. The Fed caved. Per the Wall Street Journal:

J.P. Morgan Chase & Co. has agreed to quintuple the price it will pay for Bear StearnsCos. to $10 a share, hoping to stem criticism that the banking giant was getting too sweet a deal to snap up the ailing investment bank.

The company will also buy 95 million new shares of Bear, giving it a 39.5% stake in the company and a big leg up in getting shareholder approval to approve the takeover. The purchase is slated to close by April 8.

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Other terms of the new deal are different than the original pact, including the role of the Federal Reserve, which played a critical role in the week-old deal. Among other things, J.P. Morgan will bear the first $1 billion of any losses in financing for Bear's less-liquid assets, such as mortgage securities, with the Fed being responsible for the other $29 billion.

Sure, I get what's going on here. The Fed is trying to show that moral hazard doesn't exist here due to the shifting of $1 billion in first-loss to JP Morgan. But the point is, they caved. They've (the Fed and Bear Stearns Board) tried as much as possible to hand the company on a silver platter to JPM in order to avert another shareholder uprising. But if I'm a shareholder and am feeling enlivened and validated by the Fed's behavior, why not hold out for more? I mean, the Fed is apparently in the deal-making business; why not try and cut yet a better deal? Sure, that avenue is largely forestalled by the 39.5% share sale, but hey, get organized, get all the employees, Joe Lewis, Bill Miller and the other brutalized institutional investors to "just say no." Since we now know that hardball works with the Fed, this chink in their armor can be exploited for fun and profit. What a sorry state of affairs.

by Roger Ehrenberg (Information Arbitrage)

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