Bear Stearns: An Unprecedented Rescue

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Includes: BSC, JPM
by: George Gutowski

JP Morgan (NYSE:JPM), under the protective Teflon of a Fed Reserve Mandate, makes a rescue bid for Bear Stearns (NYSE:BSC). The psychology is so bad that it tries a $2 a, share offer, which only makes the psychology worse. The stock, which traded north of $150 a share within the last twelve months, is now tantamount to a penny stock.

All this nonsense just so that the Fed and the market can say a major institution did not go down. This was to avoid the supposed domino effect of defaults caused by insolvency. At $2 a share, the Bear Board had the guts to go for more and actually got it. The $2 was raised to $10.

Where or when else in financial history have investors in a leaky lifeboat been able to negotiate a 500% increase in the terms and conditions of their rescue? Anyone? I do not believe that this has a precedent.

Some media commentators have speculated that the increase allows the existing Bear Board to say it has completed its fiduciary responsibility and exacted better terms. Given a twelve month high of approximately $159, riding the roller coaster from $2 to $10 is not an adequate discharge of fiduciary responsibility.

There is still too much fog on this battlefield. JP Morgan is working to enhance its own shareholder valuation. Has it manipulated the psychology of fear to steal the asset? Only time will tell. The market is already trading at a 20% premium to the last ransom note from JP Morgan. If the asset was bankrupt, then say so and deal with the consequences. Trying to nuance your way out of a sticky problem is not working. When investors sue, please ensure that you name the Federal Reserve as it is driving the bus on which JP Morgan so willingly bought a ticket. Will this problem become a major distraction for JP Morgan and take valuable management time away from its other responsibilities?