J.P. Morgan Agrees To Increase Bear Price
J.P. Morgan Chase & Co. has agreed to quintuple the price it will pay for Bear Stearns & Cos. to $10 a share, hoping to stem criticism that the banking giant was getting too sweet a deal to snap up the ailing investment bank.
This is beyond outrgeous.
As I noted in my previous diary, the previous deal had the following consequences:
- Bear Stearns shareholders are largely wiped out. This is as it should be;
- JPMorgan gets the good bits of BS for free; if the BS assets it picked up are bad, it is largely protected from losses by the Fed, but if they are less bas as feared, it gets all the upside. This is a great deal for them;
- the Fed provides a guarantee which gives it no benefit in any case (beyond saving other banks from BS's meltdown), but may end up costing it up to $30 billion. Not a good deal [for taxpayers]
Thus, the only part of that deal which was not outrageous, ie the shareholders of Bear Stearns being wiped out, is now being corrected because these shareholders were not happy. The fact that the Fed made a gift of $30 billion of taxpayer money to JPMorgan has somehow led to much less outrage; there has been only a small modification to the terms of this:
Other terms of the new deal are different than the original pact, including the role of the Federal Reserve, which played a critical role in the week-old deal. Among other things, J.P. Morgan will bear the first $1 billion of any losses in financing for Bear's less-liquid assets, such as mortgage securities, with the Fed being responsible for the other $29 million [sic - that would be billion].
JPMorgan's market capitalisation, now equal to $156 billion, has increased by more than 25% (ie precisely $30 billion) since the deal was announced, and is unchanged today, proof positive that the improved terms it has grudgingly provide are still a great deal for it - and of course it is, given that it took over the valuable bits of Bear Stearns it wanted (notably the prime brokerage, and other valuable stuff like the Manhattan building) and it bears very little risk on the rest, thanks to taxpayers stepping in.
The $30 billion increase in JPMorgan's value shows the price that could have been extracted for the Fed guarantee... If an exemple was ever needed what the priorities of our deciders are...and their wilful incompetence at managing the public purse.
I wonder if the Democratic candidates will speak against the deal?