JPM Guilty of Grand Theft Investment Bank

J.P. Morgan's (JPM) acquisition of Bear Stearns (BSC) is starting to look more and more like a crime with the Federal Reserve and Treasury Department guilty of aiding and abetting. Government officials orchestrated a grand theft investment bank.

As of yet, of course, there is no definitive deal. Yet Morgan almost got away with "buying" Bear for just $2 per share. The government, it seems, was desperate to close a deal and just as desperate to punish Bear's shareholders. Morgan was smart enough to realize it was the only bidder in the game. It could name any price it liked and that's exactly what it did.

But shares of Bear immediately started trading well above the offer price. And now, after only one week, Morgan decided it needed to allay some of the ill will its initial offer created. So, it decided to increase its offer--by five times! If this does not confirm that Morgan's initial offer amounted to highway robbery, I don't know what does.

With Morgan's new offer the government is still assuming most of the risk by guaranteeing Bear's toxic mortgages. But instead of doing this through Morgan, it could have done the same thing directly through Bear. Either way, the burden to taxpayers is the same. By working through Morgan, however, the government can be sure that Bear's employees and shareholders get absolutely pummeled.

One day a lot of hard questions will be asked about exactly what went on. Harvard professors are probably already working on a case study. Dozens of books will eventually be written on the subject. In the final analysis, it will become evident that, with the government's help, J.P. Morgan almost stole Bear Stearns.

Comments

[sirfman]

The shareholders should immediately organize themselves and fight the bending of NYSE rules. Usually for such an massive issuance of new shares it needs SHAREHOLDER APPROVAL.

If I take the existing outstanding shares (145.4M), then the newly issued 95million shares mean an addition of 65.34 %. It is the question from whch angle you are looking at the issuance.

There should be a shareholder meeting with the following points to be voted on:
1. Can the amount of outstanding shares increased by 65.34% or 95M new shares from former 145.4M shares to new 240.4M shares? (YES/NO)
2. If... and only IF - 50% of the shareholders vote "YES", can this 95M shares be sold to JPM for $10/share?

The BSC BoD used the exemption or bending of NYSE rule 312.03 with the excuse, that "waiting for shareholder approval might hurt Bear’s financial viability" . If this would be really the case:
1. Why are earnings not published?
2. Why is there no determination of a corrected and more realistic book value?

BSC's troublesome position is very well described by SEC chairman Christopher Cox in his letter to Dr. Nout Wellink, Chairman of the Basel Committee on Banking Supervision on 20th march 2008

"As you will see, the conclusion to which these data point is that the fate of Bear Stearns was the result of a lack of confidence, NOT A LACK OF CAPITAL. When the tumult began last week, and at all times until its agreement to be acquired by JP Morgan Chase during the weekend, the firm had a capital cushion well above what is required to meet supervisory standards (!!!) calculated using the Basel II standard."

My impression is: The BoD is acting under duress and coercion and not evaluating the best options for the existing shareholders. They act more in favour of a coming shareholder, who has only a small vote until now.

From JPM's point of view the new deal looks like going into a shop, printing your own money on the shop's photocopy machine and afterwards buying the shop with that money. And the shopkeeper himself is just happy, that he holds some "money" in his hand.

I would not be very surprised, if investors like Joe Lewis, James Barrow, Bruce Sherman and Bill Miller, who all put real money in BSC, will collaborate to fight the bending of NYSE rule 312.03.

With today's share price at $11.25 only Joe Lewis is still sitting on a heftly loss of $1,124,375,754.
He should invest now a few millions in the best lawyers to fight this "amended" agreement, which cut his voting power from former 8.35% to 5.05%.
On the financial side he and other investors should buy, what is still cheap now, and push the price up. Simply try to imagine, if BSC is on 8th April 2008 at $20/share. How could by then JPM and the BSC BoD justify the $10 offer?
Maybe then we will see another amended agreement, that will focus more on a realistic book value of BSC and find the support/approval of more BSC shareholders.

[Sam Mccarthy]

WHAT WAS THE REAL CRIME ??

A PUBLIC STATEMENT PROCLAIMING BSC WOULD BE SOLD AT $2.00 A SHARE WHEN ALL PARTIES INVOLVED KNEW THIS WOULD NEVER HAPPEN. Sellers lost millions at $2.00- 4.00 a share in the LARGEST PLANNED shake out ever. These shares were bought by high level folks who knew the offer was to be much more. THAT IS THE REAL CRIME.

[who]

Well the additional sale of securities (if legal) just shows how morally empty is corporate America. How can BoD sale so much stock without (1) SE approval and (2) shareholder approval?!

As investors there is very little protection from BoD, imagine what would happen if any listed company sold additionally 60% of open stocks on the open market.

Why did not Fed just open its lending to BSC just as it did after brokering the deal? Not all debt held by BSC was bad.

[BalanceSheetChecker(BSC)]

Everyone just calm down. The deal won't actually go through because it was designed not to. See my comment here:
seekingalpha.com/artic...

The courts will decide it was illegal and business will resume as normal for Bear Stearns (but it will take time).