The Opening Bell: Blubbering Bear

NYT's scoop on JPMorgan’s new offer; all that costly regulation!; the Japanese talk smack; etc.

The New York Times goes above the fold on A1 with a major scoop that JPMorgan Chase is discussing quintupling its $2 bid for Bear Stearns to help the deal go through with ticked-off shareholders of the No. 5 Wall Street firm. Lots of great detail in this one.

The Times says the Federal Reserve, which essentially put the deal together by guaranteeing $30 billion in shaky debt (or “Bear scat” as we like to call it), is sketched out by the higher price. It fears it will look even more apparent to taxpayers that it’s bailing out Wall Street.

The NYT also breaks the news that JPMorgan is in talks with the Fed to assume at least the first $1 billion in losses on that $30 billion. Add that to a quintupled price and JP’s investment is getting pretty big now—about $2.2 billion, compared to the original $236 million, assuming the likelihood that the debt does indeed go bad.

In a fascinating detail, Andrew Ross Sorkin reports that one of the reasons for the talk of a higher price is that mistakes were made in drawing up the contract in the haste to get it done last weekend before opening bells in Asia.

One sentence was “inadvertently included,” according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said.

When the error was discovered, James Dimon, JPMorgan’s chief executive, who was described by one participant as “apoplectic,” began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa.

Sorkin also reports that Dimon has said privately he would “send Bear back into bankruptcy” if shareholders don’t agree to the deal but advisers have told him to tone it down.

The Times gives us a peak inside a crumbling institution, a den of alpha-dog thieves reduced to blubbering and tilting at windmills:

Inside Bear, the vitriol over that bargain-basement price was palpable last week. Bear employees own more than a third of Bear’s stock, and many longtime employees faced the prospect of losing all their savings. On Monday, some were seen crying in the hallways of the firm’s Midtown Manhattan headquarters.

One employee started a Web site to rally opposition to the deal. Some employees said they talked back to their new supervisors from JPMorgan, which commandeered desks and conference rooms after being given operational control of the firm last week.

Meanwhile Bear’s board is machinating to hand the company over by selling 39.5 percent of the stock to JPMorgan, which would then need to convince just one in 10 shareholders to sell in order to take over the company. The NYT says such a board move could draw lawsuits.

Regulatory weak spot, indeed

The Wall Street Journal leads its page one with a story on how the regulatory climate is shifting in favor of more oversight for the first time in nearly three decades. And what is it worried about most? The “potentially costly challenge to business.”

The WSJ ticks off a list of areas that have seen problems lately: lead-paint toys from China, contaminated drugs from China, bum beef and spinach, as well as arcane financial instruments. Even the don’t-touch-it Bush administration and its bedfellows see the (at least political) necessity of increased regulation:

When lawmakers return from their spring recess March 31, they plan to begin work on what could be a sweeping overhaul of the financial regulatory system. Under the current system, responsibility is spread across at least eight agencies, an arrangement Securities and Exchange Commission Chairman Christopher Cox last week called “nearly irrelevant to today’s market”…

“Obviously the crisis in the subprime [mortgage] market has revealed a regulatory weak spot,” said David Chavern, chief operating officer of the U.S. Chamber of Commerce.

Bloomberg includes the move toward regulation in a piece about threats to the economy, raising the specter of “bigger government” in its lede, and dropping the Quote of the Day at the bottom of its story:

”We’ve got a bad bargain,” adds Raghuram Rajan, a former IMF chief economist who’s now at the University of Chicago. “The Street gets all the upside and the government gets the downside” when Washington has to rescue firms in times of trouble.

In the wake of the bursting of the stock market bubble in 2000 and the collapse of Enron Corp., Congress passed the Sarbanes-Oxley Act (SOX). It required corporate managers to attest to the accuracy of their financial statements, toughened accounting rules and increased the authority of the Securities and Exchange Commission to police fraud.

Now, says Rogoff, “We’re going to end up with SOX squared.”

Worse than Japan?

The Financial Times talks to the Japanese finance minister who says the U.S. must pour taxpayer dollars into the markets to solve the financial crisis. He should know.

The FT is also holding on to its scoop, denied elsewhere, that the U.S. and European central banks are discussing buying up mortgage-backed securities to artificially boost that locked-down market.

Here’s the most notable paragraph of the story:

The remarks are the first public expression of concern by a Japanese cabinet minister that the impact of the current financial market turmoil could be much more serious than Japan’s experience during its “lost decade” of abnormally slow economic growth in the 1990s.

The FT doesn’t back this extraordinary claim up with any quotes from the finance minister. “Much more serious” than the Japanese depression of the 1990s?

We’d like more information on that, but all we’re told is that the official said Japan’s woes were limited to the banking sector, while current U.S. problems are more widespread.

Rats, sinking ship, etc.

Here’s a story to watch: the WSJ goes C1 with an exclusive that former Countrywide execs are forming a company to buy up distressed mortgages—not mortgage-backed securities but whole loans.

Essentially these guys would be trying to profit off the collapse of a system they helped weaken.

PennyMac’s plan to profit from the mortgage industry’s turmoil is likely to draw fire, especially from those who believe Countrywide’s aggressive sales tactics and lowered lending standards helped lead to the subprime-mortgage troubles in the first place.

“The whole subprime mortgage fiasco was built on sort of Wall Street’s snake-oil salesmen convincing America this is a can’t-miss scheme,” says Irv Ackelsberg, a consumer lawyer in Philadelphia who testified to the Senate Banking Committee on lending last spring. “It sounds like they’ve just morphed into some new version.”

We don’t know whether to buy this bit of unhappy talk from the execs who have an interest in lowballing the market right now, but it sounds about right:

It thinks whole-loan losses have barely begun to materialize, and a new wave of problems is coming as certain loans with low initial “teaser” rates reset to higher rates, squeezing borrowers’ ability to pay.

Oh, right, the Little Man

The Los Angeles Times has an interesting story on how the Fed’s moves last week to bail out Wall Street were made possible by a 1930’s law created to help out the “little man.”

(Speaker of the House John Nance) Garner may have rolled in his grave at what the Fed did with his largely forgotten bit of populist lawmaking, but most economists applauded.

“It was almost a miracle that it was there, and it was a miracle that someone in the Fed figured out how to use it,” said David M. Jones, a former Fed official who is now chief economist at Investors Security Trust in Fort Myers, Fla.

There’s that much-misused word “populist”, but this is a good story overall.

Fees, fees, and more fees

Also on C1, the WSJ has a good analysis of how the financial sector’s rebound last week may not last. It “faces a business environment unlike anything it has seen in more than a decade.”

“The earnings power of financials has been bruised and the question is, how fast can it come back,” says David Kostin, market strategist at Goldman Sachs Group.

Mr. Kostin rattles off a list of income sources from recent years that, while not necessarily dead, are going to be greatly reduced for some time to come. “You had mortgage origination, mortgage-servicing fees, loan-commitment fees, advisory fees, and then the home-equity fees, consumer fees,” he says.

The paper also notes that firms are highly likely to become more risk averse and take on less debt, which has goosed returns for years.

Yes, and?

The FT fronts a confusing story saying some credit securities have lost a third of their value while others have lost 95 percent. It says the numbers are “the first public price estimates for specific structured credit securities to have emerged since the start of the credit crisis.”

Context, people. Context.

End times

The WSJ fronts a gloomy look at the New Malthusianism. It’s today’s must-read:

Now and then across the centuries, powerful voices have warned that human activity would overwhelm the earth’s resources. The Cassandras always proved wrong. Each time, there were new resources to discover, new technologies to propel growth.

Today the old fears are back.

The Journal says the increasing population’s increased prosperity is putting unbearable strains on resources and raises the prospect of sharply slowed economies and an increase in wars as states battle over increasingly scarce basics like water.

Next up, Lightstone

The WSJ on C3 says another commercial real-estate investor is in trouble, this time Lightstone Group, which bought Extended Stay Hotels from Blackstone for $8 billion near the peak of the market last year.

Lightstone is more than a week late on $31 million in debt and is negotiating with creditors to delay its payment. Even if it cuts a deal, the company will struggle because of its massive debt load, which is 13 times its annual earnings.

Lightstone CEO David Lichtenstein was always one of our favorite interviews when we were at the WSJ, and this shows you why:

Lightstone Group was founded in 1988 by Mr. Lichtenstein, who recently said on CNBC that “you’re safer giving your children to Britney Spears for child care” than to invest in a New York real-estate company in this environment.

The hotel industry is facing a wave of new supply at a time when demand for travel is falling. That makes the odds that much stiffer for this deal.

Exports up, NYC down

In economic news, exports are up big as the weaker dollar makes it cheaper to buy U.S. goods overseas. That’s somewhat easing the pain of the downturn.

Bloomberg reports that Wall Street has slashed about 35,000 jobs, nearly as many as it cut after the bust seven years ago.

The NYT says on A1 that New York City, with its economy tied more closely than ever to the Street, is in trouble.

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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 Follow him on Twitter at @ryanchittum.