Tuesday, March 18, 2008
Bear Stearns Shareholders May Reject $2 JPMorgan Sale
Let's face it. The $236 million sale of Bear Stearns at $2 per share to JPMorgan is a sham. Senior Executives, with stakes of over $100 million even at the reduced pre-sale market price of Bear shares, saw their life savings go up in smoke. So did the former James E. Cayne, the former Chief Executive, who holds 5.8 million shares which are now valued at $28 million, considering the current market price of just over $4. And so did outside investors such as Bahamas based Joseph Lewis, who bought into Bear Stearns shares worth $1 billion last year.
And now they can't believe that $236 million is what they get for a firm whose Wall Street headquarters alone is worth a billion and a half. Most were expecting a negoatiated deal worth at least a few billion dollars. And now they want to fight back and refuse to vote to ratify the sale, in hopes of holding out and finding a better alternative, or just pray that the market stabilizes and Bear Stearns can continue business as usual and slowly try to pick up the pieces. Joseph Lewis said on CNBC that he planned to vote against the sale.
Whether the shareholders succeed in scuttling the deal or not, the question remains about the intent behind the firesale at this ridiculous price. Yes, they were facing bankruptcy. Yes, they had no alternatives. But let's look at it from another angle. What's the Fed's point of view here? They want to prevent a bankruptcy because that would have forzen the positions taken by hedge funds with exposure to Bear, and there would have been carnage. But neither did the Fed want to be seen as bailing out a primary broker who couldn't see the sky falling right until it hit.
So could this just be a delaying tactic? A temporary respite to Bear Stearns, giving the hedge funds time to escape and/or giving Bear time to rebuild and gain a measure of credibility. At some point in the near future, when the dust settles, this deal could be nixed or re-negotiated and Bear could then decide what it wanted to do, on realistic terms. Sell off at a market price closer to what it really deserves, maybe. Or just buckle down and try to fight it out once the Fed's new $200 billion liquidity plan kicks in and primary brokers such as Bear are able to borrow directly from the Fed against mortgage backed securities.
Simply put, what the Fed did was kick the can down the road, using JPMorgan as a proxy. Can't say I disapprove of it. In fact, I have to applaud whoever has been advising Bernanke of late. One after the other, he's pulled out blinders and is hitting the ball out of the park everytime. First the Fed came up with the $200 billion Term Securities Lending Facility (TSLF), then the Bear Stearns episode and the Fed's decision to authorize the Federal Reserve Bank of New York to create a lending facility for primary brokers, instead of having them go through banks.
But more than all this, what is the Fed's crowning achievement is that the light finally downed on them that the rate cuts are providing only a window of relief to the markets, not a permanent boost. So they announced a 25 basis point cut to reduce the discount rate to 3.25 percent. Which, along with the other measures, gave a temporary boost. And now they have the option of reducing further by 50 to 75 points. The Fed of last month would have made just one cut of 75 points. As of now, the DOW has already jumped 200 points in anticipation of the second rate cut. Thus, by saving part of their powder for another shot, the Fed gets two bounces. At this rate, the Fed may even be able to find a permanent solution to the market's malaise. Which is an astonishing development, considering that just a month back, everybody had written off the Fed as virtually powerless.
And now they can't believe that $236 million is what they get for a firm whose Wall Street headquarters alone is worth a billion and a half. Most were expecting a negoatiated deal worth at least a few billion dollars. And now they want to fight back and refuse to vote to ratify the sale, in hopes of holding out and finding a better alternative, or just pray that the market stabilizes and Bear Stearns can continue business as usual and slowly try to pick up the pieces. Joseph Lewis said on CNBC that he planned to vote against the sale.
Whether the shareholders succeed in scuttling the deal or not, the question remains about the intent behind the firesale at this ridiculous price. Yes, they were facing bankruptcy. Yes, they had no alternatives. But let's look at it from another angle. What's the Fed's point of view here? They want to prevent a bankruptcy because that would have forzen the positions taken by hedge funds with exposure to Bear, and there would have been carnage. But neither did the Fed want to be seen as bailing out a primary broker who couldn't see the sky falling right until it hit.
So could this just be a delaying tactic? A temporary respite to Bear Stearns, giving the hedge funds time to escape and/or giving Bear time to rebuild and gain a measure of credibility. At some point in the near future, when the dust settles, this deal could be nixed or re-negotiated and Bear could then decide what it wanted to do, on realistic terms. Sell off at a market price closer to what it really deserves, maybe. Or just buckle down and try to fight it out once the Fed's new $200 billion liquidity plan kicks in and primary brokers such as Bear are able to borrow directly from the Fed against mortgage backed securities.
Simply put, what the Fed did was kick the can down the road, using JPMorgan as a proxy. Can't say I disapprove of it. In fact, I have to applaud whoever has been advising Bernanke of late. One after the other, he's pulled out blinders and is hitting the ball out of the park everytime. First the Fed came up with the $200 billion Term Securities Lending Facility (TSLF), then the Bear Stearns episode and the Fed's decision to authorize the Federal Reserve Bank of New York to create a lending facility for primary brokers, instead of having them go through banks.
But more than all this, what is the Fed's crowning achievement is that the light finally downed on them that the rate cuts are providing only a window of relief to the markets, not a permanent boost. So they announced a 25 basis point cut to reduce the discount rate to 3.25 percent. Which, along with the other measures, gave a temporary boost. And now they have the option of reducing further by 50 to 75 points. The Fed of last month would have made just one cut of 75 points. As of now, the DOW has already jumped 200 points in anticipation of the second rate cut. Thus, by saving part of their powder for another shot, the Fed gets two bounces. At this rate, the Fed may even be able to find a permanent solution to the market's malaise. Which is an astonishing development, considering that just a month back, everybody had written off the Fed as virtually powerless.
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