From the WSJ: J.P. Morgan to Buy Bear Stearns
J.P. Morgan Chase agreed to buy Bear Stearns for $2 a share in a stock-swap transaction, people familiar with the matter say. J.P. Morgan will exchange 0.05473 shares of its common stock per one share of Bear Stearns stock. Both boards have approved the transaction.
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March 16th, 2008 at 7:50 pm
what is the effect of carry trade unwinding ? IS it gonna be a problem ?
March 16th, 2008 at 8:41 pm
I take it that $2 price was some kind of token to avoid trigger those bankruptcy clauses on credit default swaps.
March 16th, 2008 at 8:55 pm
I believe that so far, CDS on Bear are not in a credit event situation i.e no default, but that’s one for the lawyers.
March 16th, 2008 at 9:23 pm
I was trying to say that by buying them out at $2, JPM prevented BSC from defaulting. The $230MM was just chump change so BSC wouldn’t have to file Chapter 11.
March 16th, 2008 at 10:46 pm
I understand, the bankruptcy would have been a disaster for the system and JPM is effectively being paid to take over BSC.
But for CDS there are others clauses than bankruptcy that count as credit event such as restructuring and I don’t think that would qualify.
March 16th, 2008 at 11:13 pm
Let’s see how much of the risk the Fed bears. The fact that JPM is paying anything for BSC shares suggests that the Fed (and the taxpayers) are bearing a good chunk of the risk. If JPM were taking on all Bear’s liabilities, I figure they would pay zero for the equity.
March 17th, 2008 at 3:05 am
I don’t know, the Fed is clearly bearing mark to market risk but ultimately losses will be from charge-offs due to defaults. This has been the big issue in this crisis, mtm has no correlation with default.
March 17th, 2008 at 5:56 am
I think the $2 price was meant to prevent default and give Bear time to find an alternative buyer or solution. Why would a shareholder approve this price? They would be better off in a liquidation.
March 17th, 2008 at 6:18 am
It could be, but the buyer has to get Fed approval. It’s almost impossible to find an alternative to JPM, long time bankers to BS, they know the firm inside out. And in a forced liquidation it is not certain that the shareholders would get anything. The bankruptcy filing would be avoided at any cost to prevent a systemic collapse. If Bear had not agreed they probably would have been nationalized.
The better in a liquidation argument works only if you have time on your side and there is none here.
March 17th, 2008 at 8:47 am
The $2 price was not meant to prevent default. If that was a concern, $0.01/share would have sufficed. The $2 was to give something to BSC mgmt so they would agree to a deal. And that $2 came right from the taxpayers. If the Fed didn’t fund the questionable assets, JPM would have paid zero for the equity.
And to think shareholders are better under forced liquidation? Alex, have you been smoking with Jimmy Cayne? Look at their balance sheet, the shares are worth zero in a liquidation.