Monday, March 24, 2008

Bear Stearns Part III

The Days of Our Lives soap opera just took a new turn. The producers decided throw a new twist that caught as least me by surprise. You have got to love drama. Unless you have been under a rock you know JP Morgan raised its bid from $2 to $10 over the weekend. That isn't the important part of the deal in my opinion. JPMorgan is now on the hook for the first $1 billion in losses. The Fed had originally guaranteed the first $30 billion and now the way I understand it is that JP Morgan is taking the first billion in risk and the Fed gets the next $29 billion.

This begs all kinds of questions. I can understand the logic (though I didn't expect it) on why JP Morgan would raise the bid. The equity portion of the cost is a small piece of the total cost when you start looking at liability and legal expenses. Why would the new deal consist of JP Morgan taking on credit risk? Why would JP Morgan agree to that after all ready agreeing to the previous deal? Of course some would argue they got a gift from the Fed so how could JP Morgan say no in the Fed asking to take on some of their risk they orginally agreed to? It also raises the question if another firm could buy it at a higher price without the Fed's backstop or whether it is worth more than $10. If things normalize you don't need the Fed backing. There is no question it is worth more than $10 with the Fed backing it. It is worth alot more but it was bankrupt, worth $0, nada, until the Fed stepped in. Should there be a bidding war on the Fed's ticket of paying the check and taking on the risk? All you have to do is look at JP Morgan's market cap gain to see that the market is adding over $20 billion dollars to JP Morgan value as a result of this deal. Of course the Fed's implicit picking of JP Morgan shows that at least the Fed thinks JP Morgan is safe so it is an easy for fund managers to justify buying JP Morgan stock. "It is safe." So I think quite a bit of that market cap gain has nothing to do with the Bear buyout but an easy buy for fund managers protecting thier jobs in buying JP Morgan who need exposure to financials.

As I said last week. Buckle your seatbelts. The soap opera has more twist and turns than the Rattler at Six Flags Fiesta Texas in San Antonio.

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