Comments on: Senior Bear Departures: Signs of Valuation Headaches for JP Morgan?

By: Yves Smith

Yves Smith — Sat, 24 May 2008 23:07:00 +0000

Other quick thoughts (and anyone with expertise is encouraged to speak up):

1. 383 Madison no doubt tried to settle this and isn't happy with what they were offered (of JPM may be trying to delay to push this out beyond the closing of the Bear acquisition). You don't file lawsuits as your first move. You send nice letters, then nastygrams, then sue.

2. The comments about ignoring other rights under the ground lease may indicate that JPM is acting as if it can assume the ground lease (ie, by keeping the Bear legal entity around). You'd have to read the ground lease and the merger agreement to see how much a stretch that was.

3. I imagine the normal outcome 383 would want/expect upon an offer to buy the building is they'd waive their right to exercise the option in return for a considerable increase in the ground lease payments to the new owner.

4. Dunno if 383 Madison has enough access to dough to buy the building (they presumably could get an equity partner) but JPM does not want that building in someone else's hands. The Bear HQ has trading infrastructure that JPM badly needs and any new owner could extract an above market rent (there was a case many years ago, in 277 Park, when Chemical spent $100 million, which was an enormous sum at the time, putting in a state-of-the-art trading room. The landlord then hit Chase for a massive increase in rent when the lease came up for renewal. I have no doubt there have been less public versions of the same behavior). That's why the fact that this has wound up in court is odd.

By: Yves Smith

Yves Smith — Sat, 24 May 2008 21:52:00 +0000

Well, Bear and JPM signed a merger agreement and are well on the way to executing it. JPM has already assumed operational control. Recall that Bear sold 39.5% of its shares in the form of newly issued stock already. The arguably artificially cheap price of the building was part of that deal; you can't easily retrade it now. If the building should have been sold to either JPM or 383 Madison at a higher price, how do you now convey that extra value to the Bear shareholders as of the announcement of the merger (March 18) who were cheated? There is no mechanism for doing that.

And the board members may be liable, particularly Bear's (yes, they have insurance, but they may still have to defend a suit. Time consuming and draining).

So I expect the 383 Madison types will be able to extract a large payment for this huge oversight (where the hell were Bear's lawyers on this one?). The 383 Madison people effectively have a right of first refusal. That is a VERY valuable right that was ignored. Believe me, the simplest (only) answer is to pay them to go away. And they ought to be able to extract something pretty handsome (although it may be hidden from the public via renegotiating the ground lease to give 383 Madison greatly higher payments).

By: Anonymous

Anonymous — Sat, 24 May 2008 21:03:00 +0000

Why doesn’t JPM just offer them the building at the “fair market price” that the plaintiff’s are arguing that it is worth? That might shut them up – especially if they have to raise cash.

Am I missing something here?

By: Anonymous

Anonymous — Sat, 24 May 2008 16:56:00 +0000

Bank failures don’t cause recessions, they lengthen them,” Mason, the Drexel professor, explained. “We could get a mild recession that could linger for a while longer because of the inability to recharge capital in the banking and financial system.”

By: Anonymous

Anonymous — Sat, 24 May 2008 15:14:00 +0000

HOOCOODANODE there were problems at BS? or that it might take more than a weekend to perform due diligence? I’m SHOCKED!