Bear Gets Butchered

Bear Stearns shocked Wall Street by selling itself for just $2/share to J.P. Morgan & Chase (JPM), the bank that stepped up Friday to bail it out in tandem with the New York Federal Reserve. In order to make the deal palatable to J.P. Morgan, the Fed will assume risk on up to $30B of Bear Stearns' riskiest assets, including $20B of mortgage-backed securities.

Bear shareholders will receive 0.05473 JPM shares for each BSC share, worth about $2. Bear shares fell 47% Friday to close at $30. Last week shares traded at $60, and traded as high as $170 just one year ago.

The deal is already coming under massive criticism from Bear Stearns shareholders, including employees who had much of their life savings sunken in the company. "Why is this better for shareholders of Bear Stearns than a Chapter 11 filing?" one shareholder asked during a conference call last night. A source familiar with the deal said federal officials gave the firms an ultimatum: Do the deal today -- we may not be here for you tomorrow.

Did J.P. Morgan grab a bargain? Only time will tell. But it certainly wants shareholders to think so: "Despite recent events, the health of franchise and the prime brokerage and clearing business is in good shape," a JPM executive said Sunday.

JPM does, however, assume some of Bear's large positions. BSC had $33B in mortgage-related securities at the end of February, including $2B tied to subprime home loans and another $15B tied to Alt-A mortgages. "This deal could still be a complete disaster for J.P. Morgan, but the most likely scenario is that the bank is big and strong enough, along with the Fed's $30 billion insurance policy, to restore confidence," Whitney Tilson of T2 Partners said.

While other bidders could theoretically emerge, it's unlikely to happen due to the degree of uncertainty surrounding Bear's positions. "There's absolutely zero chance of another bidder because Bear is a huge black box," Tilson said.

Comments

[ChaulmoograOil]

There may have been a typo in your previous article on Bear Stearns, where you wrote that it was possibly to be sold for $20/share. The zero...

[ChaulmoograOil]

There may have been a typo in your previous article on Bear Stearns, where you wrote that it was possibly to be sold for $20/share. The zero...

[ChaulmoograOil]

The headline was: "J.P. Morgan on Verge of Buying Bear for $20/Share".

[SA Editor Eli Hoffmann]

Heh. It looks like it, doesn't it. That was yesterday...