JPMorgan Chase upped its offer for Bear Stearns from $2 a share to $10.13 yesterday in a bid to appease shareholders, staunch an exodus of Bear employees, and prompt Bear customers to have faith in the company as a going concern. In an extremely unusual move, the board gave JPMorgan new shares that give it about 40 percent of the Bear vote, making it much more likely it would be able turn away any further insurgency by (less) wiped-out shareholders.
The $1.2 billion deal still values the company at less than 20 percent of what it was trading at two weeks ago. As Bear shareholders got a 400 percent increase in their holdings, the Federal Reserve got JPMorgan to shave 3.3 percent off its $30 billion guarantee of Bear’s shaky debt. Now taxpayers are just guaranteeing $29 billion in Bear scat.
Bear shareholders had screamed that they were getting “mugged,” as The Wall Street Journal on A1 quotes CEO Alan Schwarz as saying.
Here’s The New York Times:
Mr. Dimon’s about-face illustrates the deep complexity and political sensitivity of a deal with participants who reached into the highest corners of Washington, from the Treasury to the Federal Reserve System. It also underscores the extent to which JPMorgan and government officials underestimated the wave of anger and opposition that would flow from irate Bear employees and shareholders who saw the original $236 million that JPMorgan agreed to pay just a week earlier as far too cheap.
And finally, the low-ball offer cast Mr. Dimon as an unscrupulous negotiator in the eyes of envious rivals, who felt no compunction in raiding Bear for its talent, with many employees only too happy to leave. The new terms, he hopes, will show him to be a more pragmatic deal maker, willing to seek compromise to save a deal that for the time being at least, brought a jolt of confidence to Wall Street.
The Journal in its front-page story says Senator Chris Dodd is going to haul JPMorgan, Bear, the Fed, and the Treasury Department before Congress as early as next week.
And in a C1 column the Journal says JPMorgan secured the rights to Bear’s midtown headquarters building no matter what happens with a shareholder vote, and reports that it’s “highly unlikely” the bid will be upped again.
The Times’s Andrew Ross Sorkin, who broke the news yesterday, reveals that the Fed had to convince Bear execs that it was headed for bankruptcy, pushing them into the $2 deal. Kick back and watch the Fed play hardball with its bailouts:
But the night that Bear signed the original bid, the Fed opened what’s known as the discount window to companies like Goldman Sachs and Lehman Brothers—oh, yes, and to Bear, too. Except that the Fed didn’t tell Bear that it planned to open the window when it was signing its deal with JPMorgan.
Had Bear known it might have access to the discount window—a crucial source of liquidity—it might have been able to hold out for a couple more days or at least had enough leverage to seek a higher bid. But the Fed clearly preferred the original bid.
Inside Bear, jaws dropped at what many considered a broad deception by the Fed. Alan D. Schwartz, Bear’s chief executive, was furious, as was the board and its team of advisers. Several JPMorgan executives even offered their apologies about the way the deal “went down.”
Get out your Magic 8 Ball
Stocks continued to rally yesterday, with the Dow popping up more than 187 points (1.5 percent) and the S&P 500 up 1.5 percent and Nasdaq up 3 percent. The Dow’s rise puts it at 12548.64, or just 11 percent below its peak in October. That’s a pretty small sell-off considering all we’ve been through since October and with the economy in downshift. In the last bear market, the S&P sold off half its value.