March 24, 2008 10:24

The Bear that would not die

Maybe it would have been simpler just to let Bear Stearns go bankrupt.

When the Fed swept in just over a week ago to arrange a shotgun marriage between JP Morgan Chase and Bear Stearns, the idea was to avert a sudden collapse of the investment bank that might have caused credit markets to completely freeze up, while at the same time avoiding anything that looked like a bailout of Bear's shareholders. The result was a fire sale at $2 a share, or about $250 million--less than Bear's stake in its midtown Manhattan headquarters building is worth.

After that deal was announced, though, the price of Bear's shares stayed in the $5 to $7 range. There were all sorts of theories as to why, but the one that was increasingly discounted as the week wore on--that speculators were betting that the deal wouldn't go through at $2 a share--turned out to have some truth to it. An apparent miswording in the original deal document opened a door for rival bids that JP Morgan Chase had meant to shut, Andrew Ross Sorkin reported in the NYT. Dealbreaker's John Carney is dubious of this explanation, but in any case, while the rest of us were at home eating eggs made of chocolate and giggling at Peeps dioramas, JPM executives were frantically renegotiating the deal. They've now upped their bid Their bid is now expected to rise to $10 a share, and the people at the Fed apparently aren't thrilled about developments.

So what are we to make of this?

1) There really was no good reason for the run on Bear Stearns--just a self-fulfilling panic. The people at JP Morgan Chase have had more than a week now to look through Bear's books, and they still want it, and are now willing to pay more than a token price (although it's still pretty cheap). The NY Post reported yesterday that SEC chairman Chris Cox said as much (the "fate of Bear Stearns was a lack of confidence, not a lack of capital") in a letter he wrote last week.

2) On the other hand, if there was no good reason for Bear to die, its management had to be pretty inept to let it reach a state where rumors were enough to kill it.

3) Fed arranged non-bailouts are always going to be ugly. The Federal Reserve can react and improvise with a speed (and a fat wallet) that no other government agency can. But the deeper it gets into the affairs of individual financial institutions, the worse the potential recriminations and lawsuits are going to be afterwards. One of the Fed's great strengths is that doesn't have to stick to any kind of strict rulebook. But we use rulebooks in government for a reason, and the folks at the Fed may be starting to find out why.

4) Wall Street's more fun when it's preoccupied with ugly, potentially lawsuit-filled merger battles than with the end of financial capitalism as we know it.