I am mystified at the efforts by soon-to-be-ex chairman of Bear Stearns and still-barely-a-billionaire Joe Lewis, who took a large stake in the securities firm, to try to find another buyer for Bear.
My pet theory is that Lewis et all are bluffing, knowing they have a very bad hand, to scare bondholders and CDS owners to buy up the shares and are selling into their bid.
But as strange as that is, a stunning revelation came from a very senior Japanese executive, who sent these notes from a meeting with a top Japanese financial official:
The depth of the problems at Bear Stearns which led up to the buyout are not clear. Mr. X wondered why they did not try to use committed credit lines before agreeing to the JPM Chase deal. These lines were significant and included large amounts committed by Japanese banks, who are now relieved that they did not have to extend the credit.
Maybe Bear assumed at the rate of its cash depletion that it would burn through those credit lines quickly and being more leveraged might make other solutions more difficult, but the tone of the Japanese notes is that the credit lines were large enough in aggregate to have made a difference.
And even odder: those credit lines are still in place (although the downgrades by the rating agencies on Friday might have changed the pricing or reduced the size of facilities). Why did the Fed stump up a whole $30 billion? This seems a tremendous oversight on its behalf. Yes, those lines no doubt terminate upon a change in control, but if Bear draws them down, they become an obligation of JPM when the deal closes.
The Fed probably could have leaned on the banks to keep them in force. After all, they would be lending against a better balance sheet with JPM, although adding the Bear lines to whatever credit facilities they now have with JPM might put them over their limits for exposure to any one bank. But the Fed could have offered to backstop the excess, which would be a smaller commitment than the one it made.
After all, the whole logic of the Fed going to the lengths was to save the rest of the banking and securities industry, not Bear per se. The fear was that a bankruptcy filing would have lead to colossal disruption, possibly failures of other firms, and writedowns at other firms due to forced sales of securities. The Fed thus had considerable leverage to persuade other firms to go along, particularly since they were already obligated to lend to Bear. Syndicating the risk, particularly when the parties were already exposed, would have been a logical move.
Stranger and stranger….