Bear Buy, Fed Moves (Update 2)

Go out to the gym and big news happens. But hopefully this announcement will stop or at least slow the run on Bear.

JP Morgan’s price of $2 a share represents a price of $270 million, or 1/4 the estimated value of Bear’s headquarters building. The discount reflects JPM’s leverage but also the perception that despite all efforts to avoid doing so, the bank will probably wind up eating some liability. (Note the Wall Street Journal reports the total damage at a mere $236 million).

The Bloomberg headline on the main news page also indicates that the Fed is taking a $30 billion first loss position in the deal, but I don’t see any indication in the text of the stories up on either the WSJ or Bloomberg Update: we have confirmation from Greg Ip at the Wall Street Journal:

But, by also agreeing to lend up to $30 billion to J.P. Morgan Chase & Co. to finance illiquid assets inherited from its purchase of Bear Stearns Cos., the Fed is taking on new risks.

With a $13 trillion book of derivatives and no opportunity to do due diligence, there could be some real worms there…..but the End of the World of Finance as We Know It was a fate worth avoiding. Note that JP Morgan agreed to do the deal with no outs. That’s highly unusual, but necessary to stem customer flight. This was a very gutsy move on Dimon’s part. I hope he doesn’t live to regret it.

The Fed also cut the rate at its discount window 25 basis points to 3.25% and extended the maximum term to 90 days. This is significant because it is also the rate on offer at the new term facility, the TSLF.

As of this writing, the yen has gone to 98.1. That’s a bad sign, it indicates further deleveraging is underway. This may merely be due to orders placed for execution on the markets’ open and may reverse considerably as the day progresses. But if it stays at this level or worsens, we are in for a rough ride in the credit markets tomorrow.

From the Wall Street Journal:

The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies’ boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday’s close, Bear Stearns’s stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.

Effective immediately, J.P. Morgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. The deal isn’t subject to any conditions, except shareholder approval. It is expected to close before the end of the second quarter.

There is some brave talk on Bloomberg as to how this move puts a floor under the financials. I don’t buy that at all. Indeed, consider this section of the Journal article:

Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns’s troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.

We are at least a year, perhaps as many as three, away from the bottom of the housing market. We don’t yet know how bad the damage to the financial system or the economy will be. A crisis was averted because a strong player stepped forward. Will JPM be willing or able to do this again? I doubt that a purchase by Chris Flowers would have the same potential to calm the marekts. After JPM, HSBC, and perhaps Buffett (although I can’t imagine him eating this much risk, it’s just not his style), there are not a lot of deep pockets around.

We can take at most one more near train wreck like this. Let’s hope that somehow we manage to avert that fate.

Update 8:50 PM: The yen is now at 96.66. The Nikkei is also down 340, but that is less troubling than the action in the yen. Most commodities that trade now, save gold and silver which are up less than the 3% move in the yen, are down. Deep recession fears may be starting to trouble the commodities bulls.

This is worse than I had thought, and that with a buy in place. Seriously not good if there is no reversion soon.

Update 10:15 PM: The yen has weakened a teeny bit, to 96.95, the NIkkei is down 541, gold and silver are now up over 3%, mirroring the move in the dollar, most energy commodities are up (but not proportional to the dollar fall) ags are mainly down, copper is up a half a percent.

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  1. ssternlight

    I can’t help but wonder if this means that BS bonds go back to par now that the first $30B are guaranteed by the Fed and the rest backed by JPM — clearly too big to fail.

    Is this an incredibly sweet deal for them or what? From what I see a number of them were trading in the 60’s and 70’s.

  2. doc holiday

    Small issues:

    As of the date of this prospectus, we have issued approximately $103,755,094,650 aggregate principal amount of Senior Debt Securities under the Senior Indenture, of which $32,752,155,000 is currently outstanding. As of the date of this prospectus, we have not issued any Subordinated Debt Securities.

    Bear Stearns Companies Inc · 424B5 · On 1/31/08
    Filed On 1/31/08 5:15pm ET · SEC File 333-136666 · Accession Number 1047469-8-745

  3. S

    jamie dimon is saying that the fed action is broad and deep and will stem the flood in the broker dealer community. I guess when you can dump all your garbage on the fed’s doorstep perhaps it is so. “investment grade”

  4. ssternlight

    “the fed action is broad and deep and will stem the flood in the broker dealer community. “

    Reminds me of the “We have ample liquidity” quote of last week…

  5. Anonymous

    They need to take a tea break and remember a few things in this antitrust mess:

    Welcome to the Bureau of Competition

    The Federal Trade Commission’s Bureau of Competition champions the rights of American consumers by promoting and protecting free and vigorous competition. The Bureau:

    reviews mergers and acquisitions, and challenges those that would likely lead to higher prices, fewer choices, or less innovation;

  6. S

    Funny. JPM buys bear and THEN the fed opens the window to Broker Dealers? What if the Fed opened the window last week? Would BEar be a $70 stock? We are basically being told this is a confidence issue as jamie dimon said on the call that BSC had good risk controls and was comfortable with the marks. Therefore if the collateral isnt some time bomb then why didnt the fed just open the window and begin to provided a facility to BSC until the “liquidity” cures itself. I am sure such a line to the fed would be equally good as a JPM full faith a credit guarantee. Stealth nationalization – lucky Jamie Dimon. Asia is tanking gold at 1020

  7. eTrader

    Now Yen broke 97.00 and is still going..

    Clearly, unwound of carry trades are going on. Watch out for commodities…

  8. dis

    opening the window for broker dealers was far too late for bear.

    but this move is about lehman. they are extremely worried about lehman

  9. a

    Basically the Fed has rolled the dice on this one. If Lehman goes in spite of the Fed action, then it’s bank holiday time, because Citi would be the next domino.

  10. Steve

    Well, we finally have a print on level 3 mortgage-related assets. Multiply by -1. Not a confidence-inspiring revelation about the solvency of other banks. And I think this gets right at the basic contradiction in Treasury’s and the Fed’s approach to date: they want liquid markets, but not market pricing. The Fed just became the market for level 3, and printed.

  11. John Stark

    From the NYT story:

    Fed officials said they would take control of the investment holdings of Bear Stearns in order to maximize their value and minimize disruptions as a result of a cash squeeze. Without providing details, Fed officials insisted that the $30 billion loan was covered by even the most conservative estimates of the Bear Stearns holdings.

    So if the fed controls Bear’s “investment holdings,” what is JPM’s role here? Are they just part of a ruse, enabling the Fed to portray this as one private firm taking over another? Did they stick JPM in there in hopes that people would not call this a nationalization?

  12. Anonymous

    “We can take at most one more near train wreck like this. “

    Such a stupid, unprovable, hysterical comment.

  13. Anonymous

    “Are they just part of a ruse, enabling the Fed to portray this as one private firm taking over another? Did they stick JPM in there in hopes that people would not call this a nationalization?

    Excellent analysis. That is exactly it. It’s a charade.

  14. reblack

    1:50, What a twit, and an anonymous one too.

    Yves has been writing every day for quite a while. He’s been I’d say at least 90% accurate. People like Nouriel Roubini were dismissed as hysterics have been proven right.

    Show me your record of predictions and maybe I’ll take you seriously. If you want to point to hysterics, I’d put the Fed at the top of the list. If the people in charge are clearly desperate, isn’t that a sign that things are precarious?

  15. Yves Smith

    Anon of 1:56,

    I hate to be a stickler, but there are two differences.

    The Fed (or the feds) is not responsible for managing Bear. JPM can actually fire a lot of the employees once it takes over. Uncle Sam wouldn’t have the foggiest idea of what to do (it might figure out something, but the lack of an operational strategy would look pretty poor). Keeping all those bodies around (when the Street is stealing all the clients, so revenue collapses) would be costly, and it would have to keep the top brass, which would look pretty bad.

    The Fed is only on the hook for $30 billion. That’s I believe 5% of Bear’s balance sheet if you accept its financial statements (which JPM says it does, but how can you be sure with all those OTC trades?)

    BofA thought it got a deal with Countrywide, remember? If things get really bad, the Fed may not look as dumb as it looks right now.

  16. Anonymous

    Socialising (30B of) risk + privatising (future potential) profits = no surprise.

    Bear’s financial obligations are intact, its shareholders lost 90+%, and management wil be out the door RSN. Very smooth, IMHO.

  17. a

    I’ve read that it’s not only the equity holders of BS which are being wiped out; the bond holders are also on the hook before the Fed begins to lose money. Can anyone confirm?

    By the way, does anyone find the 2 dollar per share value a little funny? Normally in these kind of circumstances the company is bought for a dollar a share. Was 2 settled on so that BS could hold up their heads high with the claim that these was really a take-over and not a bankruptcy?

  18. Boat52

    If Bear went bankrupt, one would have expected a surge of litigation against the senior executives perosnally. In a takeover, perhaps they have even more personal asset protection. I doubt that the corporate veil could be pierced, but there were some very strong statements made last week that an aggressive legal tam might argue were part of a fraud. If things were getting so bad, why wasn’t trading stopped early in the day on Friday?

  19. Yves Smith


    The issue wasn’t the collapse of the stock price, that was symptomatic of the fact that customers were closing accounts and counterparties were refusing to trade with Bear and sending business elsewhere. Bear’s $17 billion reserve of cash and equivalents evaporated between Tuesday and end of day Thursday.

    There is no mechanism for halting trading in credit markets or OTC derivative markets, where most of the action is. This paper does not trade on exchanges, which is why counterparty risk is a big deal.

  20. ssternlight


    It looks well contained in the equity markets to me. We’ll see. Someone must think JPM got a steal though to bid BS up.

  21. S

    ttoal stealth nationalization and schumer the chmuck is on tv saying the JPM is a great baalnce sheet to stand behind bear stearns. This is laughable. Then he expounds on the idea that the giovernmeent should do more. Exactly wrong. Leadership is officially dead.

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