It’s Official: JP Morgan Capitulates, Raises Bear Offer to $10 a Share

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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  1. a

    “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.

  2. don

    John Hussman:

    “In effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns’ mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. “

  3. Anonymous

    Does no one see the similarities between this and the handling of the Iraq war?

    The complete and utter incompetence on the part of Halliburton, JPM and Bear Stearns?

    The secrecy and opaqueness?

    The perfidy?

    And at the end of the day, the Federal Government waiting with check book in hand, ready to indemnify all, just so long as they are big business interests?

    Could any other outcome be expected with this administration?

  4. eh

    I heard the non-recourse loan (a total effing disgrace to begin with) will be $29b instead of $30b.

    I agree it is a farce and I would think not something that would inspire confidence and/or optimism in the markets. Yet they are up; go figure.

  5. Idaho_Spud

    You have to wonder if this doesn’t leave a bad taste in Bernanke’s mouth. He’s been hoodwinked by one of the playas now.

    Do you think he will look askance at further assistance for huge IBs?

  6. Anonymous

    Why isn’t anyone raising the question of conflict between Jamie Dimon being a director of the New York Fed and the CEO of the company taking on this deal???????

  7. Anonymous

    Is the board diluting the shares to providing 40% stake to JPM really looking out for the shareholders best interest?

    What if the BSC is really worth $20 a share? Who fights for that?

    Also, seems like the deal is pretty good if you can just dump all the bad stuff on the Fed.

  8. Anonymous

    This fiasco is merely a template of the taxpayer sellout that is to come when the Treasury and the Fed start buying all the crappy mortgages out there in THE BIG BAILOUT — thereby relieving banks, Wall Street IBs and hedge funds of their toxic waste… … all in the name of “stabilizing the financial system”. And of course, since no one knows how to value the crap, you can be sure that the Treasury/Fed will be completely out-foxed by Wall Street. Truly a repugnent and predictable outcome to the whole “deleveraging and mortgage fraud affair.” The taxpayer cost will be enormous, and the moral hazard beyond measure.

    To top it all off, the perps who gave us this mess will walk away scot-free, with big bucks intact.

  9. Anonymous

    This whole thing is illegal and a bunch of people should be going to jail including Big Bone Ben.
    Welcome to the USSA.

  10. Anonymous


    Surely the next focus point is Bank of America’s proposed deal with CountryWide. With CFC possibly facing $30bn in refinacing in 2008 ($11.5bn of bank lines can be pulled with a change of control and debt maturing of $17bn and there is the repo), BAC appears to have CFC over a barrel. Surely, BAC must view the BSC/JPM fiasco and realize it could renegotiate a lower price. I guess though this is unlikely – just so long as a higher price is not mentioned. $30bn of refinacing is even big for BAC.

  11. Anonymous

    Bear Stearns isn’t worth a plug nickel. Their derivatives exposure and inane leverage got them where they are.. and the employees and executives think they’re somehow being “done wrong” ? They’re being done right by not forced to the BK table. This isn’t about shareholder value; this is about employee buy-in of the going concern named JP Morgan.

  12. eh

    They’re being done right by not forced to the BK table.

    I’m no bk expert, but is it a given that the stock goes to zero? Especially when the employees own such a large chunk — 30% is the figure I recall for BSC. And wouldn’t BSC have access to the new Fed lending facilities for primary dealers — PDCF and TSLF? So maybe they could reorganize and resume operations as an independent firm pretty quickly, albeit a badly damaged one. It’s conceivable.

    I still think the biggest fear on Wall St was that BSC’s portfolio would be marked to market in a bk procedure and this would then give a price to similar paper held by other market players.

  13. roger

    I’m amazed we aren’t at Dow 13,000. The U.S. Government officially knocked down the door and asked the financial sector to loot as much as they want. Who needs profits when the subsidies are this rich – and exclusively for the rich?

    But it is all so symbolically perfect, a shambolic, corrupt performance capping eight years of madcap semi-fascism, from the government agreement to take pills from pill companies at any price said company wants to set to a foreign policy that combines the morals of Blackwater and the intelligence of… George Bush.

    Down the drain we go.

  14. Lune

    Call me a contrarian, but this might actually work out better for the U.S. taxpayer. IMHO, Bear employees are about to overplay their hand, and in the process, really kill the company. I suspect that the longer it takes to get the deal done, the less of a chance it will happen, firstly because once everyone lawyers up, progress will become glacial, and secondly because people will start to realize what a truly horrendous deal this is for the general public footing the bill. Already, the coverage of the deal has shifted from “the Fed / JPM saves the financial world. Hurray!” to “wait a sec. Just what is JPM getting? And why did we have to commit $30bil?!”

    My prediction: if a deal isn’t signed, sealed, and executed by the time Congressional hearings begin, you can forget about it. And the way things are going, nothing will get done before then. (For once, I’m praying for more lawyers :-)

  15. Yves Smith


    I wish you were right, but Dimon now believes he has the votes, and the shareholders’ meeting is April 8.

  16. Yves Smith

    I stand corrected. Several press outlets made it sound as if JPM had already bought 39.5% of the shares; instead, the revised deal (documents reportedly not yet finalized) gives JPM an option to acquire.

    And at least one source (Steven Davidoff at the NY Times Dealbook) thinks this deal is more vulnerable to being upended than the earlier one.

    So the spoiler would be Joe Lewis….

  17. Lune

    If the shareholders sue to block the issuance of those 39.5% of shares, then I’m assuming JPM won’t be able to exercise their option until after the court’s verdict. That could take a while.

    I don’t empathize with Bear’s employees (not only should their equity be wiped out, but their bonuses should be clawed back too, IMHO), but my honest advice to them would be to take whatever JPM offers. At this point, it’s a lesser evil than bankruptcy.

  18. Yves Smith

    The sense of entitlement is disturbing. There were lots of people who on paper made a bundle in the dot-com era and then lost it all. Some wound up having to work at Home Depots until the tech industry rebounded.

    As tragic as it happens to lose your life savings, a lot of businesses go bust. And these Bear guys impress me less and less the more I learn about them. They are unable (as a group) to analyze upside and downside, and failed to diversify their own portfolios. Many of the shareholdings were voluntary, not the result of deferred comp.

  19. Lune

    Voluntary?! From finance guys who should know better? Jeez… I’m even less inclined to show them any mercy.

    I’m actually starting to think these people have no idea what could come to them. The last time the country was in such a froth over financial shenanigans, the companies were called Enron and WorldCom, and last I checked, many of their executives (though not nearly enough :-) are in jail, or facing trials, or were forced to give up most of their net worth.

    If they feel entitled to sympathy, they can ask their dogs for it. The general public would rather compensate them with a lovely retirement package in scenic Rikers Island. And they might just figure out a way to do it too, especially if people keep complaining about share price when the Fed has just cleaned up $30bil of their mess.

  20. Yves Smith


    A lot of commentary in the blogsphere, as I am sure you have noticed, is with you, yet I see very little in the way of criticism in the MSM. Are they afraid to cross swords with Masters of the Universe? Haven’t they figured out those days are over?

  21. John

    Mr. Dimon is mastering the art of the spin.

    JPMorgan’s CEO, James Dimon, is playing the markets, press and Bears Stearns investors perfectly. He knows exactly what he is doing and is executing with precision. Yesterday we learned that JPMorgan sweetened the deal now to $10 USD a share, up from a shocking $2 original bid. Dimon was quoted in the Wall Street Journal as saying, ‘We took another crack at it to get it just right.’

    Our theory is that Dimon knew all along that a $2 bid would have tremendous shock and awe value. In fact, he was counting on it. What better way to steal acquire Bear Stearns’ stock than to quintuple your original offer a week after the investors and the press couldn’t talk about it enough? Current Bear Stearns shareholders and investment bank employees had already calculated the fortune that got flushed down the toilet – now, hopeful again, they would be thrilled with any double digit stock price. A classic negotiating tactic is playing out before our eyes and, for most, the offer change comes as big news. We’re thinking this approach could go even further.

    In mid-March, a beaten up Bear Stearn’s stock was nearly $60 a share. To think that JPMorgan (or anyone else for that matter) could pick it up for even $20 a share was unfathomable at that point. Now, even if Dimon takes another “crack at it,” he’ll be pleased as punch to take the stock at $15 a share – especially with the aid of the Fed. Dimon knows the potential upside and he’s already protected JPMorgan from the downside.

    If JPMorgan’s target price for Bear Stearns was $12-15 a share all along, then anything less than that is simply icing on a very sweet cake.

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