What a complete and utter fiasco (see earlier post for background). And you have to get a load of the face-saving. No official acknowledgment of the legal screw-up that made this retrade necessary. Note there is no mention of any change in the Fed’s, role, something that was rumored earlier.
This will not go down well in the coming House and Senate hearings on the central bank’s involvement.
Update 12:00 PM: Calculated Risk points to the AP’s story, which indicates that the terms of the Fed’s involvement have been modified:
The new agreement also calls for the Federal Reserve — which helped broker the emergency deal to save Bear Stearns from failure — to provide a $30 billion term loan with portfolio assets put up as collateral. Those assets will be held by a newly created company managed by BlackRock Inc.If any part of the portfolio defaults, JPMorgan will be on the hook to cover the first $1 billion in losses. As the assets are paid off, the Fed will receive principal plus any gains
The provision about gains is eyewash, but it might diffuse criticism. JPM has the right to put “illiuquid securities” to the Fed with no apparent restrictions; this pretty much assures that the worst non-derivatives dreck will be securing the Fed’s loan.
From Bloomberg:
JPMorgan Chase & Co. agreed to quadruple its offer for Bear Stearns Cos. in an effort to overcome opposition from the shareholders of the crippled securities firm. Bear Stearns stock almost doubled….Bear Stearns surged almost 70 percent in early trading in New York after the New York Times reported the pending offer. The new terms value Bear Stearns at about $2 billion. JPMorgan Chief Executive Officer Jamie Dimon needs a majority of Bear Stearns shareholders to approve the deal and has been wooing its employees with cash payments.
“This will help the deal go through,” said George Ball, who’s worked on Wall Street for more than 40 years and now leads brokerage firm Sanders Morris Harris Inc. “The price is still catastrophically low, but it will change the attitude of people who stay at Bear. Those are the people Jamie needs to win over.”….
JPMorgan also struck a deal with Bear Stearns’s board to purchase 39.5 percent of the company in a transaction that wouldn’t require shareholder approval, the companies said in the statement. Bear Stearns board members will vote in favor of the transaction, the companies said in the statement.
To complete the deal, Dimon now needs only an additional 10 percent of shareholders to approve it. About one third of the outstanding shares were owned by the employees before the dilution today with the newly issued shares that the firm is selling to JPMorgan directly….
“The Fed must have given the nod; this wouldn’t have been announced otherwise,” said Sanders Morris’s Ball….
Bear Stearns employees, directors and lawyers are prohibited from seeking an alternative transaction, according to the agreement, which was filed with regulators last week.
Bear’s financial troubles began in July, when two hedge funds that invested in securities tied to U.S. subprime mortgages collapsed. The firm, once the biggest underwriter of U.S. mortgage bonds, had to bail out the funds and take possession of many of the instruments.
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“The Fed must have given the nod…”
Hardy har har. The Fed has been shown to be completely outclassed in negotiations by Wall St. The Fed’s nod is one of weakness, not of strength.
So what we have is the Fed coming to the rescue of an entity which still has equity left. It looks more and more like the Fed is operating by knee-jerks, panicking at every turn in order to stop a panic on Wall St.