Two Dollars per Share, or an "Orderly Liquidation"?

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Includes: BSC, GS, JPM, LEH
by: Barry Ritholtz

You call this a rescue?

Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.

The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies' boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday's close, Bear Stearns's stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.

This was not a bailout of any sort.

What the NY Fed did was allow for an orderly liquidation. The Fed is providing the liquidity for JPM's Bear unwind, guaranteeing a good chunk of the debt:

"The central bank also approved the financing of JPMorgan Chase & Co.'s purchase of Bear Stearns Cos., including support for as much as $30 billion of Bear's assets."

What does THAT mean? "Support for as much as $30 billion of Bear's assets." Who is buying this -- the Fed, or JPM ?

Truly, an amazing development.

~~~

This whole affair raises many more questions than it answers:

• What sort of due diligence did British billionaire Joseph Lewis do prior to picking up 6% of Bear?

• The Fed cut 25 bps Sunday night -- what is THAT gonna do?

• Goldman Sachs Group will announce asset writedowns of about $3 billion this week -- what else is out there in terms of iBank write downs?

Nikkei off 3.6% in early trading; Dow Futures off 240, S&P 500 down -32.70, NASDAQ down -38.25

• Of all the firms most similar to Bear Stearns, one name keeps coming: Lehman Bros (LEH)

What more will we learn today?

Sources:
U.S. Fed Cuts Discount Rate, Says Dealers May Borrow
Scott Lanman
Bloomberg, March 16 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=asg0H5x.VQ4g&

A Stake Through the Heart
Bear's Biggest Holders May Have Little Choice But to Cut Their Losses
CASSELL BRYAN-LOW and KATE KELLY
WSJ, March 17, 2008
http://online.wsj.com/article/SB120571021671940207.html

J.P. Morgan Rescues Bear Stearns
U.S. Pushed Deal To Avert Crisis; A Fire-Sale Price
WSJ March 17, 2008
http://online.wsj.com/article/SB120569598608739825.html

Goldman Sachs to reveal $3bn hit
By Mark Kleinman and Louise Armitstead
Telegraph, 12:07am GMT 16/03/2008