The Curious Capitalist, Justin Fox, Economy, Markets, Business, TIME

March 16, 2008 10:11

JP Morgan Chase buys midtown skyscraper at a discount; Bear Stearns thrown in for free

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So JP Morgan Chase is buying Bear Stearns, for what everybody's reporting to be somewhere in the $230-$250 million range.

That's significantly less than Bear Stearns' newish headquarters building at 383 Madison Ave.--a few blocks from JP Morgan Chase's HQ--would fetch. Estimates Bloomberg:

The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per- square-foot that comparable office space in the city is currently fetching.

Now Bear doesn't own that building outright (according to its most recent 10K, it's got some kind of lease with an option to purchase), and there are lots of other costs to the transaction (about $6 billion, in fact) beyond the token sum that JPM is paying Bear's shareholders. But JPM CFO Mike Cavanagh wasn't kidding when he said in the conference call Sunday night: "The price that's being paid here gives us flexibility and margin for error." Especially with the Federal Reserve still offering to, as the FT put it, "fund up to $30bn of Bear’s less liquid assets – a move that will alleviate the need for a fire-sale of mortgage-backed securities."

You can't really call this a bailout of Bear anymore. The investment bank's shareholders are being virtually wiped out--the $2 a share JPM is offering seems to be mainly a token incentive to get them to vote yes on the deal, on the assumption that if they vote no Bear will go bankrupt and they'll get nothing. (Although in the most amusing moment of the Sunday night conference call, a caller who identified himself as an individual investor in Bear Stearns did tell Cavanagh, "I vote no.")

But you've got to wonder about the appropriateness of JP Morgan Chase getting Bear handed to it on a platter by the Fed. The other day I posted excerpts from a speech by Bank of Sweden Governor Stefan Ingves--one of the main architects of Sweden's successful bailout of its banking system in the early 1990s--in which he emphasized how important it was that any government rescue of a financial institution strike "a balance between all of the interested parties who come forward when a bank is in distress."

The Fed was working too fast for balance on Bear Stearns. JP Morgan Chase was the only buyer that could possibly get it done over the weekend, and the Fed seemed to be afraid that if Bear wasn't in safe hands by the time markets opened Monday in Asia it might start a worldwide run on financial institutions. So JP Morgan Chase got what from the looks of it is an extremely sweet deal. If I didn't know better, I might be tempted to call that crony capitalism.

Update: John Carney at Dealbreaker delves a little deeper into the 2007 Bear Stearns 10K than I did and finds that Bear put a $570 million valuation on its interest in 383 Madison.

Update 2: Wall Street veteran Roger Ehrenberg points out that while the deal represents a "calculated risk" for JP Morgan Chase, it's still a risk (via Colin Barr):

I believe the Fed's $30 billion backstop addresses most if not all of the portfolio issues related to BSC's holdings of mortgage securities with some left over. However, the combination of hard-to-value Tier III holdings and leveraged loans together with the value diminution in their high-value businesses raises the question "is it enough?" Bottom line: likely yes. But is also wasn't so likely last week that BSC shareholders and employees would be wiped out and left to wonder "what happened?" So I am invoking the sentiment of that brilliant philosopher Yogi Berra: It ain't over 'til its over. And believe me, my friends, it ain't nowhere near over.

Update 3: More posts on the same topic here, here and here.

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Reader Comments (10)

Brew:

A little off topic, but do you think repeal of the Glass-Steagall Act enabled our current situation? I don't think it would have caught subprime problem per se but the separation between commercial and investment banking may have restricted the industry so that our current situation wouldn't have escalated? Or should there be something in place? (If so, then what?)

Posted by Brew | March 16, 2008 11:43 PM

Gerik:

Somehow I have a suspicion that Paulson and/or Bernanke will end up with a nice job at JP Morgan Chase in a 10 months.

Posted by Gerik | March 16, 2008 11:44 PM

rrsafety

I think "crony capitalism" is kind of a cheap shot, as is the post by Gerik. The sudden and abrupt liquidation of Bear Stearns would have been an horrific disaster for the markets. This was definitely the right thing to do. The fact that Bear Stearns shareholders are getting pennies on the dollar is their fault, not the Fed's.

Posted by rrsafety | March 17, 2008 9:52 AM

Justin Fox:

I don't think Paulson and Bernanke are going to go to work at JP Morgan Chase, and I don't think the deal is corrupt in the sense that Jamie Dimon is going around greasing people's palms in Washington. I also don't think the Fed had much choice--but that strikes me as evidence of some pretty deep flaws in our system of financial regulation. We have this pretty straightforward setup for dealing with runs on actual banks, but nowadays most of our actual banking seems to take place outside of regulated depository institutions. So the Fed has to wing it.

Posted by Justin Fox | March 17, 2008 10:05 AM

Justin Fox:

Oh, and Brew's Glass-Steagall question is a good one. I don't know the answer, but I'll think/ask around about it. Bear itself wasn't directly affected by the repeal, though.

Posted by Justin Fox | March 17, 2008 10:27 AM

billdog1:

I think this is going to catalyze an even further reduction in the US Dollar's value against the Euro. The dollar is only going to continue to fall.

http://www.webelowear.com

Posted by billdog1 | March 17, 2008 11:52 AM

jncc1701:

First I do not know why anyone is surprised by all this- small mortgage companies were making bad loans and passing on the burden to bigger banks who in turn were passing it to Freddie Mac and Fannie Mae. Now the tax payer get to pay not just for a tax cut for the rich (just how much will the CEO of Bear sterns get while JP Morgan lay off thousands) but to bail out these Ivy League MBAs. And yes I agree not doing so is worse but where is the anger at having to pay for it on both ends?

An article in the NYT on June 11, 2003 said

"Members of Congress promised today to investigate Freddie Mac, the government-chartered buyer of home mortgages, and they gained an influential ally, Alan Greenspan, in their efforts to end the company's special exemptions from securities laws.
The lawmakers announced plans for at least one, and probably more hearings into Freddie Mac, which is conducting an internal investigation into its accounting practices. On Monday, it fired its president, David Glenn, saying that he failed to cooperate with the inquiry. Two other top executives, the chief executive and the chief financial officer, stepped down."

the smoking gun was there, but we could not burst the illusion of growth now could we.

Posted by jncc1701 | March 17, 2008 1:08 PM

Brew:

@Justin Fox: You're right it's not a direct affect but instead of caving into the banking industry and repealing the Glass-Steagall Act, if they considered strengthening and regulating the industry then we would be in less of a crisis. Just a thought, a very post-Keynes thought, I know.

Posted by Brew | March 17, 2008 1:57 PM

Gerik:

While my comment about Bernanke or Paulson getting a cushy job at JP Morgan Chase may have been a bit inflammatory, I just find it ridiculous that there was such a rush to get this done that the Fed basically felt it needed to serve up Bear Sterns on a plate. It just seems to me that they could have found some other way to prop up Bear Sterns for a month or two and found someone willing to pay more than $2 a share.

There's obviously a lot of worthless paper in the system, and someone is going to have to take the major hit and probably go out of business at the end of it all. Is the Fed going to find someone to buy Lehman Brothers next if they start having trouble? I haven't seen a good, plain-english reason that Bear Sterns was so special the US government could not let it go down.

Posted by Gerik | March 17, 2008 2:00 PM

Firmani:

Hi All –

I work with a law firm that is investigating Bear Stearns, and whether the company protected employees’ interests during the recent stock collapse. Many Bear Stearns employees saw their retirement accounts decimated by recent events, and some are questioning whether Bear Stearns acted appropriately.

Specifically the firm is looking into whether Bear Stearns lived up to its fiduciary duty to employees who held Bear Stearns stock as part of the company’s pension plan.

If you are a Bear Stearns employee and are concerned that the company’s actions hurt you or your pension plan, you may want to contact Hagens Berman Sobol Shapiro (www.hbsslaw.com/bsc or info@hbsslaw.com) to learn more about the investigation or call the firm at 206-623-7292.

Posted by Firmani | March 20, 2008 6:57 PM