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Sir, you have quintuplets
JP MorganChase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations.
More. Last week we were wondering why the price was above $2 a share. And last week some of you were calling this deal a bailout of Bear Stearns. Now Bear shareholders are alleging they were coerced into taking this deal. This is a) good news that the firm is worth more than we had thought, b) bad news for dealing with the next round of problems (it is harder for any subsequent solution to be viewed as legitimate), and c) another reason why the answer isn't just more regulation. By the way, note that JPMorgan isn't actually paying that much more.
Posted by Tyler Cowen on March 24, 2008 at 06:46 AM in Economics | Permalink
Comments
The funniest thing I read this morning about this was that Christopher Cox of the SEC said that Bear Stearns was about too little confidence, not too little capital. Is there any difference?
Posted by: Dennis Mangan at Mar 24, 2008 9:09:18 AM
The Federal Reserve back stop of $30 billion has now become a laughing stock.
Bear Stearns' bondholders (about $75 billion) should have taken a haircut on the initial bailout. The unprecedented precedent of the Fed is now exposed for what it truly was. A farcical intervention in the capital markets.
Posted by: marmico at Mar 24, 2008 9:35:07 AM
I love all the continuous references to the recent double digit stock price, as evidence that the "real value" of BS must be above the token $2 dollars, without any attempt to account for all the missing information from those stock prices that $30 billion dollars in now evacuated toxic loans communicated.
Evidently from JPM's actions to win over BS's Staff and Shareholders, the risk free net value of BS is more than $2. Isn't this why nationalization of BS, would have been the better solution than this fiasco. This is like the ER patient complaining bitterly about the bill to the hospital accountant on his way out of surgery.
How do say "moral hazard" in a clearer way than this.
Posted by: Nyongesa at Mar 24, 2008 9:37:46 AM
marmico,
How do you make the bondholders take a haircut without making counterparties take a haircut? The whole point of the exercise was to avoid the whole negative externality thing, you know, of counterparty risk blowing up in an ugly destabilizing global-meltdowny way and taking Lehman down with it.
I have to wonder if this was planned from the start. JP Morgan's original lowball offer provided a heavy safety margin for a rushed sleep-deprived decision made without opportunity for due diligence. In the absence of any huge nasty surprise since then, they could afford to offer the "real" price. $10/share is still a huge drop from the pre-deal $30 or recent $70 or last year's $170. If they had announced $10 as the price right from the start, there would have been almost as much howling and outrage as there was for $2. But the $2 offer softened them up and now the $10 almost feels like they've been made whole. Path dependence indeed.
Posted by: at Mar 24, 2008 11:45:35 AM
Professor Cowen,
For purely selfish reasons, I'd love to see your response to Dr. Gokhale's criticism of your NYT open at
Cato-at-Liberty. It's an interesting discussion...
Posted by: Nate at Mar 24, 2008 12:31:36 PM
"Real value of Bear Stearns" -- does this phrase have any meaning?
If the government had not intervened, the stock value would be zero due to a "run". Anything above zero is gravy.
This seems to be a huge bailout -- not so much of Bear, as of those who loaned money to Bear.
Posted by: zbicyclist at Mar 24, 2008 12:55:57 PM
This is like the ER patient complaining bitterly about the bill to the hospital accountant on his way out of surgery.
Based on market movements since the Fed rescue, it seems easy to argue that Bear's assets are more liquid and more valuable. It's a big win for the Fed!
So, should this newfound windfall go to (a) Bear Stearns shareholders, who were dead but are now alive; (b) JP Morgan shareholders, who heroically reached into the abyss (with the Fed holding them tightly), or (c) the taxpayer, if anyone could figure out how?
If this is just a random wealth transfer between Bear and Morgan shareholders, why should we root for Morgan? It is not as if Bear Stearns was the prime mover in this sub-prime debacle.
OTOH, Bear was useless during the LTCM bail-out and Morgan has been performing their historic role of lender of second-to-last resort, so I suppose I can get behind them.
Posted by: Tom Maguire at Mar 24, 2008 1:04:55 PM
The re-pricing of the Bear Stearns deal is a little unfortunate. In the original deal the Fed managed to contain the fallout from the Bear Sterns collapse, while simultaneously addressing the moral hazard concerns that are inherent in any bailout.
The owners of Bear Sterns, who would be the people ultimately responsible for its risk taking behavior, got taken to the woodshed, which would no doubt have encouraged the shareholders in other Wall Street firms to take a renewed interest in risk management.
Allowing the deal to be revisited will only muddy the waters. If the shareholders in major financial institutions believe that the Fed will bail them out they have no incentive to contain management risk taking.
Posted by: Deepish Thinker at Mar 24, 2008 1:30:22 PM
And now Bear is trading at $12.40 -- with a high of $13.85 no less. Looks like Mr. Market thinks we are going to repeat this all again next Sunday.
Posted by: dcpi at Mar 24, 2008 1:55:19 PM
With the stock going up from $2 to $10 does that mean the taxpayer is footing the $8 a share difference in the form of debt forgiveness and incentives?
Posted by: BlogReader at Mar 25, 2008 10:47:03 AM
"calling this deal a bailout of Bear Stearns"
True, its shareholders will lose almost all their investment. No real bailout for them. But for its bond holders and lenders, won't the Fed's intervention make a big difference?
Posted by: Stephane at Mar 28, 2008 5:13:37 AM
