Opening Bell: We Was Mugged

Congressional hearings on Bear; the Fed plays hardball; housing lobby spins; etc.

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.

Hearings loom

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.

The NYT on A1 has our Quote of the Day, summing up the reason for all the stock-market volatility.

“Opinions are really sharply divided,” said Brian Gendreau, a strategist at ING Investment Management. “Is this going to be a short and shallow recession? Or the beginning of the end of the world as we know it?”

Bloomberg says the market this year has been more volatile than at any time since the Great Depression, and reports that mutual funds are putting more of their investments in cash than they have since April 2001.

Housing lobby hooha

Investors liked the new Bear deal as well as good news out of the housing market, which saw sales of existing homes edge up for the first time in six months, by 3 percent from last month. But looked at year over year, sales were down 24 percent, with median prices off a record 8.2 percent.

Unsurprisingly, the National Association of Realtors thinks it’s a sign that the market is “stabilizing,” according to a quote from an NAR economist in the WSJ’s story on A20. Why does anyone still quote these guys with a straight face?

But the NAR isn’t alone in calling a bottom, as another pundit ties himself to the tracks in the NYT’s story:

“Sellers are capitulating and slashing prices,” said Mark Zandi, chief economist at Moody’s Economy.com. “Housing looks like it’s approachable now, compared to a year ago when it was just completely out of reach…”

“It’s not the all-clear sign for the housing market,” Mr. Zandi said. “But it signals the beginning of the end of what will be a long bottom.”

Hey, have you guys checked out the still-cavernous disparity between house prices and income levels lately? The Journal has, in its A1 story that’s mostly uninfected by housing-lobby hooha:

As measured by the S&P/Case-Shiller national index, home prices jumped 74% in the six years through 2006. During the same period, U.S. median household income rose just 15%. (Neither figure is adjusted for inflation.) That discrepancy made housing unaffordable for many Americans.

The home-price index already has come down about 10% from its peak in mid-2006. But prices might need to fall much further, some analysts say. A recent Credit Suisse report projects that average home prices have another 40% to fall in the Miami metropolitan area, 36% in Phoenix, 26% in Los Angeles and 20% in Las Vegas if they are to become more in line with income levels.

Down, down, down

Here’s the WSJ’s lede:

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.

The ability of America’s lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps—and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.

The Journal reports that about one in nine homes for sale is in foreclosure, compared to about one in fifteen a year ago.

And analysts haven’t all gone off their meds. Here’s one who warms our cold, bearish hearts:

The overabundance of foreclosed homes in the market is likely to push down home prices in much of the country for the next several years, says Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm in Cleveland.

The WSJ, in an accompanying piece on A20, says lenders can’t sell foreclosed homes as fast as their defaulted buyers can mail in the keys. Foreclosure sales were up 4.4 percent last year, while foreclosures more than doubled. The foreclosure rate is the highest since record-keeping began in 1979 and the WSJ says “lenders describe the current situation as the worst since the Great Depression.”

Unnerved Americans

In economic news, Bloomberg reports that consumer-confidence survey released today will likely show sentiment fell to the lowest since March 2003, a jittery time since the U.S. was unleashing bombs on a new country at the time.

Declining stock and property values have also unnerved Americans, heightening concern spending will falter. Without consumers, which account for more than two-thirds of the economy, the slowdown triggered by the collapse in housing and credit markets is likely to deepen in coming months.

“The consumer is currently under heavy pressure,” said Russell Price, a senior economist at H&R Block Financial Advisors in Detroit. “People have seen their buying power erode. There is likely to be further downside to come.”

As if to prove Price’s point, Tiffany & Co. reported that same-store sales in the U.S. fell 1 percent last quarter, despite the cheap dollar luring foreign tourists to its stores.

When you’re 65

The Los Angeles Times reports that the Supreme Court ruled yesterday that employers can slash benefits for retirees when they turn sixty-five and become eligible for Medicare, something old-folks advocates had said was age discrimination.

The legal dispute highlights what some say is a gap in the law. Employers are not required by law to pay for health benefits for their employees or their retirees. And in most instances, they are free to change their benefit policies or to drop coverage they had previously offered.

Over the last decade, many employers have pulled back from providing these continued benefits to their retirees because of the high cost. But until Monday it had been unclear whether it was illegal to use a worker’s age—in this instance, 65—to trigger a reduction in benefits.

The AARP says it’s another way for corporations to get around their obligations to employees.

Work your way through college

The Journal on C1 reports on the growing exodus of banks from student lending, something the paper blames on the credit crunch as well as a law passed last year that cut subsidies for lending to students. Brazos Higher Education Service Corp. is the latest to exit because of problems in the credit markets.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.