Posted on 03/17/2008 10:35:01 PM PDT by TigerLikesRooster
Bear Naked Lenders
March 18, 2008
The best thing about Sunday night's Federal Reserve-inspired sale of Bear Stearns to J.P. Morgan Chase is the price. At $2 a share for a total of $236 million, this was less a "bailout" than a Fed-mediated liquidation sale. Bear wasn't too big to fail after all, though there's still the issue of the Fed expanding its own moral and financial hazard in the form of $30 billion in guarantees on Bear Stearns securities.
Bear shareholders will essentially be wiped out in this close-out sale, with British billionaire Joseph Lewis alone reportedly enduring paper losses of $800 million on his 9.6% stake. Even on Wall Street, that's real money. Jimmy Cayne, the Bear Chairman and former CEO who supervised this disaster, will lose a bundle on his nearly 5% holding. This makes the Bear sale different from the Fed-managed Long-Term Capital Management rescue of a decade ago, when investors were left substantially intact. We doubt many bankers will look at Bear's fate and claim there's no punishment for financial error.
Bear employees, who hold about one third of its shares, are angry and grousing that they could get more cents on the equity dollar in Chapter 11. Some may even be inclined to vote against the sale, but then they'd have to find a market for that $30 billion in mortgage securities that no one wants to finance.
(Excerpt) Read more at online.wsj.com ...
Ping!
What is the old saying? You won’t see who is naked until the tide goes out? Well, I say its heading toward old tide soon.
If I knew the Fed would give me $250 million to buy Bear, I’d have applied for the deal!
It looks as though it would be too cold to sleep there at night. I pass.:-)
It seems ridiculous that JPMorgan will get their hands on his building for a fraction of what it’s worth.
Corporate Welfare.
Still Morgan got a deal. Their stock is up almost $10 billion on the news - the market's best guess as to what Bear will really be worth, shorn of its financial distress.
Yeah, but the executive suite doesn't have to give back the billions in "performance bonuses" that they pocketed. They would have had to if bankruptcy were declared.
Usually paid in company stock not immediately vested.
yitbos
So do the math:$20 billion downside $30 billion Fed backstop guarantee = $10 billion uptick yesterday for JPM.
I believe with aggressive work they'll be able to do better with the chaff than Bear did so their gain might be even larger.
If not and it's larger than the $30 billion then the Bear will eat them in about a month. (Or Bailout Ben will show up with another bag of our money)
Its still too early to say what Cayne and the other insiders lost yet. I’ll bet there was some payment of some kind in the agreement. Even if they lost everything Cayne and company had been milking the company for years. Cayne if I remember correctly sold some stock last year while it was up.
Give it a year or two and JP Morgan Chase will realize a huge gain on the orderly liquidation of thos mortgage backed securities. The average life of a residential mortgage is still under ten years with home sales and refinances paying out most of this paper.
Old J. Pierpont Morgan is smiling somewhere.
The Fed doesn't receive appropriations from Congress. It's the Fed itself that is on the hook.
I think you're right and that means the Fed mad a good move too.
Inflation Blues sung by B.B. King
Hey Mr. President
All your congressmen, too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent
I got the blues
Got those inflation blues
You know, I’m not one
Of those high brows
I’m average Joe to you
I came up eating cornbread
Candied yams and chicken stew
Now you take that paper dollar
It’s only that in name
The way that buck has shrunk
It’s a lowdown dirty shame
That’s why I got the blues
Got those inflation blues
Mr. President
Please cut the price of sugar
I wanna make my coffee sweet
I wanna smear some butter on my bread
And I just got to have my meat
When you start rationing
You really played the game
And things are going up
And up and up and up
And my check remains the same
That’s why I got the blues
Got those inflation blues
Straw man. Incredibly, or maybe not incredibly, they use this token amount as an excuse to lower rates more. They will be the last people on the planet to admit that lower rates are the problem, not the solution. If the Fed has to pour in 100 billion or a trillion to keep the financial system from unraveling, then they should do so. But they must stop lowering rates, that will only result in risky securities, speculation and bigger problems later.
Mises was right, either we pay for this mess now with taxpayer cash and recession, or we destroy the currency. There are no other choices.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.