Why Is Bear Stearns Trading Above Deal Price?

I've been getting the inside scoop from some hedgefund traders (who always request to remain anonymous). One told me that the reason Bear Stearns (BSC) is trading so far above the deal price with JP Morgan (JPM) is that bond holders who NEED the deal to go through are buying millions in equity to save their billions in debt. The will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt. Also, the equity acts as a nice hedge. If the deal does not go through, Bear Stearns equity will go up a lot and the bonds will go down.

JP Morgan's Jamie Diamond is extracting his pound of flesh from taxpayers (no one represents them) and equity holders in order to guarantee the debt of Bear Stearns.

Lesson in hedge fund thinking:

Equity up? The bank is being sold cheap at the expense of equity holders to protect bondholders. No deal means the equity can trade up speculation that another buyer with more time to analyze the company will pay up.

Bonds Down? If JP Morgan walks away from its government subsidized guarantee, bonds fall.

In the meantime, I've been buying Bear Stearns Preferred stock (BSC-PrG) as my own way of collecting some of that free government bailout money being handed out to hedge funds and JP Morgan.

As I mention on ThePanelist.com, my favorite rant about the Bear Stearns giveaway can be found at Wall Street Weather. Felix Salmon asks a bunch more unanswered questions on Bear Stearns on his MarketWatch Blog at Portfolio.com.

Disclosure: I own BSC (ouch). I am short a larger amount of 10 strike calls. I am long 15 strike calls. I own Bear Stearns Preferred Shares, BSC-PRG. I own JP Morgan (JPM). I am an unrepresented US Taxpayer.

Comments

[bsc001]

For this to work bond holders need to accumulate 50% of the stock. This is unlikely as 30% of the shares are owned by BSC employees and there are at least two 10% plus sophisticated holders. The employees ought to know what the market value of their illiquid assets is - it ain't zero and it ain't measley $2/shr. I seriously doubt that they'll therefore accept the $2 bid. And then there'll be others who would vote no at this price, and take their chances before a bankruptcy court. I don't believe these guys would be willing to take $6 current price or even $10. This deal will likely be voted down until some semblance of stability returns to illiquid markets at which point the take out price will be upped , or for 12 months when the JPM protection disappears.

[Augustus]

I sure hope that the reason for the price being up is that Joe Lewis is buying the shares and will take delivery of the securities. It will put the horrid squeeze on the naked shorts. It would be a wonderful story if it comes out that way.

Naked short bear raid. Gets out of hand and breaks company share price - but not company. Before the company has to go Bankrupt, the Govt steps in and saves it and keeps it alive. So that the assets are for sale at $2 a share with a book value of maybe $70. If those naked shorts did not cover yet, they are a real bunch of dumb pickles. If Lewis has been buying, it would not be that much of a double down for him. Particularly for a big currency speculator. If employees and Lewis already owned 40%, the other 60% would only be $120 mil at $2.

Whether it works out that way or not, it would make a great book. And, IF he could show that Morgan was involved in any of the naked shorting, a big Maybe and IF, he could end up owning the bank too. Reverse the coup. There is no If about this - lots of shares being traded that do not exist.

[User 163007]

Interesting idea....

The Bondholders do indeed need this deal to appear to be going through for long enough to liquidate at the least. They are the one's at whom yelling "moral hazard" would seem appropriate. Is there a liquid market in BS bonds right now? I know the ones I saw gained back $.35 on the dollar after the announcement -- bringing them mighty close to par at any rate. In any event, it "might" be a hedge if BS shareholders don't end up cratering the company if they refuse the deal. Remember JPM gets the building if they want it and can buy 20% of the company for $2/share if that happens. It's going to be hard to find an alternative -- other than the FED of course.

[THofler]

To David N: So you're buying BSC-G preferreds now? Does this mean you think the JPM deal will close sooner or later? What if the common stock holders are just too PO'd & keep voting it down? Are preferred holders then toast?

I bought BSC-X preferred at about par roughly 10 months ago. I thought I was safe with the JPM deal, until it dawned on me that the shareholders are unlikely to go quietly into that good night.