Why the changes to Bear Stearns deal?

Bob Moon Mar 24, 2008

Why the changes to Bear Stearns deal?

Bob Moon Mar 24, 2008


KAI RYSSDAL: Just when everyone had made peace with the idea of the Federal Reserve bailing out a big Wall Street investment bank, they went and changed things on us. Off the top of my head, here are a couple of the questions floating around out there about the new deal for Bear Stearns. If $2 a share wasn’t enough, is $10 going to satisfy them? Maybe not. Bear hit almost $14 today, closed at about $11.25. Is this now officially a bailout with a capital B, and maybe the biggest question of all, why? Marketplace’s senior business correspondent Bob Moon’s here with the answers. Hi Bob.

BOB MOON: Hello Kai.

RYSSDAL: Let’s get to the first things first here. Is the Federal Government on the hook for more money now than in the original deal, low these seven days hence?

MOON: Well, you know we were witness to a very delicate ballet when the curtain came up on this new deal this morning. See if you can follow this stretch. The Bear Stearn shareholders get five times as much as they were going to get under the original terms, but the Federal Reserve magically goes on the hook for $1 billion less than the initial deal.

RYSSDAL: Splitting the difference here. The Fed gets $1 billion back and Bear Stearns is now somehow worth more money than it was a week ago?

MOON: Yeah, we can only speculate about what motivated the Fed to agree to this. Originally it agreed to provide $30 billion of what they called “special financing.” That was another way of saying that they would make good on the amount of shaky assets from Bear Stearns. Well now the Fed’s agreeing to stand behind just $29 billion in Bear Stearns’ assets. I spoke today to securities law professor John Coffee at Columbia University. He thinks this was the Fed maneuvering for largely political appearances. It’s been widely reported the Fed originally dictated the bargain basement price of $2 a share. Well, if that price went up, it needed to get something back in return.

JOHN COFFEE: I think that was always the concern of the Federal Reserve, that if any substantial amount was paid to the former shareholders of Bear Stearns, it would look like the U.S. taxpayers were subsidizing a failing company, and that when you failed on Wall Street, the taxpayers bailed you out.

MOON: Now, many critics of this deal are saying, “Hey, take a look at $10 a share. Now it really looks like a bailout deal.”

RYSSDAL: Alright, but here’s the thing though, this deal was signed, sealed and delivered, right? Every regulator, the Fed, JPMorgan, everybody had bought off on it.

MOON: Seemed to be.

RYSSDAL: Exactly, so what is JPMorgan’s motivation now for paying more than it offered?

MOON: Well, it may have been that the longer shareholders held up this deal, that there was a bigger threat that nervous investors were just going to stop doing business with Bear Stearns, or what remains of Bear Stearns, and that could have put us right back in the same crisis. There are also some reports that in the rush to get the deal written up a week ago, that there were some mistakes made in the contract language, and that caused JPMorgan to push very hard to get this deal closed. Others say that even adding $8 a share though, shows what a good deal this was for JPMorgan. Again Professor Coffee at Columbia, he points out they still get the best parts of Bear Stearns at a fire-sale price.

COFFEE: They can go through all of Bear Stearns’ balance sheet and take the most problem-laden paper, all the subprime loans, and give it at face-value to the U.S. government. That means they’ll get the assets they want, which is basically the prime brokerage business, and maybe the skyscraper, and the rest of it can be largely given to the Federal Reserve as the buyer of last resort.

RYSSDAL: So what’s happening here is that Wall Street held its breath until it turned blue, and now it’s getting what it wanted.

MOON: Well that’s exactly the concern that some critics of this deal are expressing right now. They say, so far, the Fed seems to be signaling it’s going to do whatever it takes to come to the rescue here. Dean Baker is co-director at the Center for Economic and Policy Research. He’s very concerned just how far down this road the Fed seems willing to go.

DEAN BAKER: Well, if they don’t draw a bottom line, these are sharp people. I mean the one thing I’ll give, you know, JPMorgan, all of these people, they’re business people. They know how to cut a deal, and if they don’t think Bernanke is prepared to draw a line, they’ll just keep pressing and pressing and pressing. I don’t think there’s any doubt about that. Why wouldn’t they?

MOON: And Baker told me he’s alarmed that the Fed doesn’t seem to be demanding anything for what amounts to taxpayers money here. He suggests extracting some kind of concession here, maybe on limiting executive pay for example, and he says there’s no better time for regulators to be doing that than right now.

RYSSDAL: Well we’ll see actually if that is what happens. Marketplace’s Bob Moon, thank you Bob.

MOON: Thanks Kai.

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