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GMAC: Why the Bond-Exchange Silence?

The deal is done. Clearly the bondholders didn't stump up enough so the Fed came up with $5B + $1B to be invested through GM. It's preferred shares with an 8% div which isn't nearly enough of a deal. Rip-off city again. I'd guess the markets will love this one tomorrow.

Bear Stearns Shareholder Math

The biggest BS shareholders are the directors and officers. No doubt they will rely on the existing D&O policy to protect them against legal costs.

Why Is Bear Stearns Stock Rallying?

The bondholders get made whole doesn't seem to me like an orderly liquidation. That's a bail out and moral hazard rolled up. Let's call a spade a spade please. It sets a terrible precedent for who and how losses should be absorbed in these situations and creates fodder for years of legal action.

That's not to say it was the wrong solution at the time. I don't think anyone outside of a few people at BS and JPM know what the real consequences would have been. Obviously, as Paul Volker says, the Fed took a judgment that the consequences as they understood them weren't worth the risk. It does set a terrible precedent with respect to debt holders though.

Fannie and Freddie Get a Little Breathing Room

1. It's solvency and leverage -- not liquidity -- that's the real issue.

2. I really don't see why more leverage on a small increase in equity is a good thing given the above.

3. They both wrote off billions and admit they have billions more to write off.

What am I missing that would suggest that that they are soundly managed and should be entrusted with more funds to manage makes the slightest sense? This is just more money for a bailout of lenders as far as I can tell.

Explaining Bear Stearns' Current $7 Price

Other possible explanations:

Yes Voters:
1. JPM could buy the shares themselves up to some price to insure the deal.

No Voters:
1. CDS owners would certainly buy to prevent a default.
2. BS shareholders on sentiment that it's a raw deal.
3. Other potential acquirers -- although I agree this is a low probability event unless the valuation is way off.


Indifferent:
1. Momentum traders knowing this could climb on board accentuating the move.
2. Option MM's hedging the above.

Explaining the Bear Stearns Share Price

Another possible explanation:

It's worth it to JPM to buy equity in over $2 as the actual value of BS assets is somewhere north of that. They have to buy in enough stock to make the approval happen and there is a price up to which they will do so -- either in value or securing enough votes. .

Why Is Bear Stearns Trading Above Deal Price?

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.

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

Can anyone explain why has BS doubled from the $2 chuck take out price this morning?

Asking Too Much From the Fed

Obviously it has happened here before. The double digit interest rates of the Volker era spring immediately to mind. Since the US doesn't control the price of basic inputs like oil, or the inflationary knock on effects from China, and appears to be taking the MBS and ABS onto its own balance sheet I think the case for increasing inflation and continued dollar devaluation is quite good in the absence of rate hikes.