Today JP Morgan upped its bid for Bear Stearns, not in the face of a competing bidder but over apparent rumblings from Bear Stearns shareholders unhappy with last week’s announced deal. If however, Bear Stearns is really worth five times what Morgan offered one week ago, you would think that it would make room for Morgan to assume the risk of the $30 billion of assets the Federal Reserve Bank promised to back in the original March 16th deal brokered by the Fed.
As we dig ourselves out of the economic crisis created by mispriced risk, it is probably not a good idea for the Fed to be taking risk off of the table.
What was most disturbing about last week’s announcement regarding the demise of investment bank Bear Stearns was despite that JP Morgan was paying $2 per share—about 1% of the value of BS from its 2007 high and about 3% of its valuation from the beginning of the week — was that the Fed was assuming $30 billion in risk. What a deal. Now with the original deal breaking down Morgan increases the purchase price by a factor of five but except for a promise by Morgan to take the first $1 billion hit, the Fed is still on the hook for the bad debt. This is in addition to all of their interventions to add liquidity into the market, which includes another infusion of $50 billion today.
And all these machinations are allowing the market to rebound and weekend pundits to declare a market bottom. What is needed is more transparency and more accountability. If JP Morgan’s offer to BS was so underpriced as to threaten a shareholder revolt, why did the BS board approve it and how can they quintuple their offer without first taking on the risk the Fed assumed in order to get the deal consummated a week ago.
When a couple of months after the outset of the subprime debacle a group of investment banks got together to push a $100 billion superfund to handle all the bad debt created by mortgaged backed securities, many analysts cried foul claiming it was an elaborate mechanism to create a government backed bailout. The so called “Master Liquidity Enhancement Conduit” never did get launched and the banks slowly began to write down losses with no end in sight.
The debate is beginning to rage as to whether what is going on is a liquidity crisis or an insolvency crisis but what is becoming disturbingly clear is that large market participants have taken large risks with huge potential profits with the security of knowing that they have become too big to fail and they can offset the risk to the rest of us.
Tags: Bear Stears, JP Morgan, subprime
[...] action that may have caused the crisis. If the Fed would have allowed Bear Stearns to fail without the sweetheart deal for J.P. Morgan could that have led to a smaller scale crisis and scared some financial institutions straight, [...]
[...] earlier in March 2008, Bear Stearns was on the brink of bankruptcy when the Fed arranged for a sweetheart deal for JP Morgan to acquire it. The first announced deal had JP Morgan paying $2 per share with the [...]