Ah, the hazards (moral and other) of central bank intervention. Ladies and gentlemen, gather around and watch Wall Street play Fed Chairman Ben Bernanke.
A week ago, Bear Stearns (BSC) was about to declare bankruptcy, which would have sent its stock to zero. At the 11th hour, JP Morgan (JPM) agreed to buy Bear for $2, a price reportedly mandated by the Fed so the Fed wouldn’t be accused of funding a “bailout” (and a price enjoyed by JP Morgan and agreed to by Bear because it was better than zero). But of course the Fed was accused of funding a bailout anyway, because the only way JP Morgan agreed to move forward was the Fed’s $30 billion no-questions-asked guarantee of whatever crap Bear has piled on its balance sheet. Meanwhile, instead of thanking the Fed and JP Morgan for at least saving them something, Bear Stearns shareholders were outraged that JP Morgan was absconding with the firm at a “derisory” price, and JP Morgan CEO Jamie Dimon was trashed as a heartless bastard. Bear’s stock traded to $6, on the assumption that Dimon would be forced to raise the price. Etc.
And now, according to the New York Times, JP Morgan and Bear Stearns want to raise the price to $10, at which level Bear Stearns’ board will authorise an immediate sale of 40% of the company to JP Morgan (under Delaware law it can do this without a shareholder vote). This will leave JP Morgan needing only slightly more than 10% of the shareholder vote to get the deal done, and Bear’s board members own 5%.
What is preventing this simple price adjustment from taking place? The Fed, says Andrew Ross Sorkin at the New York Times.
What is the Fed thinking? Probably this:
A week ago, we saved the financial system by orchestrating a Bear Stearns bailout in which Bear shareholders got basically nothing–and we were still accused of a “bailout.” If we hadn’t intervened, Bear Stearns shareholders would have gotten nothing–zilch–but now that we’ve let them live, they’re demanding more. If we cave, we’ll set another awful precedent: Not only do we now look like we’ll rush to the aid of any rich Wall Street firm in need, we’ll let Wall Street use us however it pleases. We can’t let that happen!
But the Bear-JP Morgan contingent was of course smart enough to leak this news to the NYT–so now it’s the Fed who looks like a bunch of heartless bastards. And when the Fed caves–perhaps later today–it will come under a new round of fire for saving Wall Street fat cats and the expense of the little guy. And the nation’s homeowners, who are also underwater, will clamor ever louder for their own bailout. And so on…
Over the past week, Wall Street has been showering praise on Bernanke & Co for “saving the financial system.” A bank the size of Bear Stearns couldn’t have been allowed to fail, the story goes, or the world would have ended. Of course, everyone said the same thing when Enron, Drexel, and a bunch of other too-big-to-fail firms failed. And last time we checked, the world’s still here.