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What is going on at Bear Stearns ?

JPMorgan's chief executive reportedly has offered financial incentives to Bear Stearns employees who stay in their jobs after the banks combine.


Jamie Dimon met late Wednesday with "hundreds of Bear Stearns executives," Reuters reported. "At the meeting, Dimon proposed incentives to Bear Stearns employees retained by JPMorgan. Those employees who stay at the close of the deal would receive a bonus that will include JPMorgan shares," the news service reported, citing an unnamed source who was briefed on the meeting.
The story didn't estimate the value of the reported bonuses, either singly or in aggregate, nor did it indicate how many of Bear's people JPMorgan might opt to retain post-takeover. Previous media reports suggested that between one-third and one-half of Bear's 14,000 workers will be let go.
Neither company commented on the report, and Bear Stearns employees apparently remained skeptical about the pending takeover. JPMorgan agreed Sunday to acquire Bear Stearns for stock currently worth $2.41 per share - roughly 4 percent of Bear's market value a week ago - after the Federal Reserve guaranteed the value of $30 billion of the troubled firm's riskier assets. The deal brought a double dose of pain for Bear Stearns staff, undermining both their job security and personal ownership stakes in their employer. Bear employees own about 30 percent of the firm.
 
After Bear Stearns, Wall Street culture not likely to change

Wall Street investment bankers got another lesson about the dangers of risk-taking this past week with the downfall of Bear Stearns Cos. The question now obviously is, how long will it last?
Those bankers, many of whom lived through market debacles like the dot-com bust at the start of this decade, turned out to have very short memories. And so analysts believe the sale of Bear Stearns to JPMorgan Chase & Co. for a stunning $2 per share ultimately won't have that much of an impact on how Wall Street conducts business.
In fact, bankers and traders are under even more pressure to reap big returns because of the ongoing credit crisis, and risk is just part of the game.
"There's an old saying on Wall Street that, for traders and bankers, you'd have to take a normal 30 year career and distill it to 15 years," said Quincy Krosby, chief investment strategist for The Hartford. "This whole episode might change Wall Street for a little while."
Krosby believes that Bear Stearns' near-collapse, which followed the company's investing too heavily in risky mortgage-backed securities, might force some bankers to change their ways in the short term. But it won't be enough to temper the financial industry's relentless pursuit of money.
Indeed, the past decade has seen a number of investing fiascoes that Wall Street doesn't appear to have learned much from. Krosby noted the go-go Internet days — when untested high-tech companies reaped piles of cash in public offerings. The lesson then was, don't put a lot of money into a venture that isn't on fairly solid ground — but mortgages granted to people with poor credit are quite akin to high-tech firms that had never turned a profit. In both cases, investors gleefully looked past the risk.
Now investors are smarting from what happened to Bear Stearns. And traders are somewhat chastened, for now.
Erin Callan, the chief financial officer for Lehman Brothers Holdings Inc., said her firm has certainly become more wary about the risks it takes amid the credit crisis. However, the market's gyrations also offer Lehman's army of traders an opportunity to make money.
"We just try to come in, and run the business the best way we can," she said. "But, you can't survive if you take no risks at all. All we can do is plan in this environment, making sure we do all the things to optimize running the firm."
It seems there's little that will change an industry and a lifestyle attached to Wall Street, which is thought of by Americans as more than just the center of free-market capitalism. Its culture attracts men and women with a swashbuckling mentality — smart, aggressive risk takers with the potential to become very rich.
And, their skills in trading and investment banking were proven this past week — even after news of Bear Stearns' buyout.
Chief executives at Morgan Stanley, Goldman Sachs Group Inc., and Lehman Brothers pointed out that trading desks played a big part in offsetting massive mortgage-backed asset write-downs, which have ticked past $156 billion for global banks since last year.
As the three companies released first-quarter earnings data, Morgan Stanley said equity trading revenue surged 51 percent to $3.3 billion. Revenue at its fixed-income sales and trading group dropped 15 percent to $2.9 billion, but it was still the firm's second-highest performance ever despite having to write down $2.3 billion linked to subprime mortgages and leveraged loans.
And that pleased investors. Morgan Stanley had its largest gain in more than a decade on Wednesday, climbing 18.8 percent to $42.86. Rival investment banks also had their best week since 2001.
But, investors shouldn't get too comfortable — the investment banking industry, and Wall Street in general, still have a long way to go before they can be called healthy. It's not just the credit market problems that are an issue, it's also the struggling U.S. economy and its potential to hurt other countries.
"Until we feel more certain about the worldwide economies, we don't see things picking up dramatically," said Goldman Sachs CFO David Viniar. "We just need to keep plugging away."
Wall Street culture not likely to change - Yahoo! News
 
http://www.nytimes.com/2008/03/24/business/24deal.html?hp
JPMorgan Chase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations.
Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share — a figure that represented a mere one-fifteenth of Bear's going market price.
The Fed, which must approve any new deal, was balking at the new offer price on Sunday night after several days of frantic, secret negotiations, these people said. As a result, it was still possible the renegotiated deal might be postponed or collapse entirely, said these people, who were granted anonymity because of their confidentiality agreements.
 
From one of may favorite economists, John Hussman. Good contrarian viewpoint of the FED action last week. :-k
Full comments and weekly articles at: www.hussmanfunds.com



March 24, 2008 Why is Bear Stearns Trading at $6 Instead of $2?
John P. Hussman, Ph.D.
All rights reserved and actively enforced.



" PARTIAL ARTICLE:

Why is Bear Stearns trading at $6 instead of $2?



Bear Stearns is trading at $6 instead of $2 because unelected bureaucrats went beyond their legal mandates, delivered a windfall to a single private company at public expense, entered agreements that violate the the public trust, and created a situation where even if the bureaucratic malfeasance stands, the shareholders of Bear Stearns will either reject the deal or be deprived of their right to determine the fate of the company they own. Very simply, Bear Stearns is still in play. Still, when all is said and done, my own impression is that the ultimate value of the stock will not be $2, but exactly zero.

In effect, the Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.” What is a “non-recourse loan”? Put simply, if the homeowners underlying that weak tranche of debt go into foreclosure, they will lose their homes, and the public will lose as well. But J.P. Morgan will not lose, nor will Bear Stearns' bondholders. This will be an outrageous outcome if it is allowed to stand.

In my view, the deal would be palatable if J.P. Morgan was to remain fully responsible for any losses on the “collateral” provided to the Federal Reserve, assuming shareholders were to consent to the buyout. As it stands, Congress should quickly step in to bust the existing deal and demand an alternate resolution, by clearly insisting that the Fed's action was not legal.
The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people – the Fed does not, even under Depression era banking laws. The “loan” falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a “loan” to J.P. Morgan was true, J.P. Morgan would be obligated to pay it back, period. The only point at which the value of the “collateral” would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.

The deal was made under duress, to the benefit of a private company, on the basis of financial assurances that the bureaucrats involved had no business making. The Federal Reserve is going to put up public assets and accept default risk so that Bear Stearns' own bondholders are effectively immunized?! That's not sound monetary policy – it's a picnic for insiders, bought and paid for through the abuse of public funds by government officials too unprincipled even to recognize the abuse. The only good thing about this deal is that it buys time while principled ways of busting and restructuring it can be settled.
This is not an issue of letting Bear Stearns “fail” on the claims of its customers and counterparties. Nobody wants that. The issue is the method by which it was rescued – who was protected, and who was not; why a consortium was not used instead of a single firm; why the claims of Bear's bondholders should be secure while the public bears the risk of the toxic waste foisted upon us. This deal should, and I believe will, be restructured. J.P. Morgan will cry foul, but that will be like a child who found the Easter basket and is now forced to share the chocolate. Bear Stearns is worth more than zero in acquisition, provided that the bondholders take an appropriate loss.

As of November's 10K report, Bear Stearns had $9 billion in unsecured short-term debt, and $66 billion in long-term debt. The $12 billion in shareholder equity, of course, is gone. Any portion of the debt that is unsecured should be the first to fall. If Bear Stearns is worth $2 a share to somebody (provided $30 billion of “non-recourse loans” from the Fed), and yet Bear's bondholders and even the unsecured lenders can still expect to be paid off on over $75 billion of debt (J.P. Morgan assumes that obligation as part of the buyout), then the public guarantees aren't required in the first place. What is required is that Bear's bondholders take a loss, as they should, rather than the public doing so.

In the unlikely event the value of Bear Stearns is negative after entirely zeroing out both shareholder equity and bondholder claims – then and only then is there a problem for Bear's customers and counterparties. But in fact, J.P. Morgan is already willing to take on all of Bear's assets and liabilities, including over $75 billion in debt to Bear's bondholders, for $2 a share. This is an indication that bondholder's claims would not even be wiped out in a full liquidation. Surely, whatever loss is required to transfer the ownership of the company should be taken by the bondholders, not by the public.

Again, this is not water under the bridge, and the deal struck last week should not be allowed to stand if we care at all about the integrity of the capital markets. The Long-Term Capital crisis was resolved by a consortium of financial institutions providing capital in return for ownership. The panic of 1907 was resolved the same way. This deal should be busted, and fast. If there's not a single buyer that will take on both the assets and liabilities without the government assuming private default risk, Bear's assets should be put out for bid, Bear's bonds should go into default, and by the unfortunate reality of how equities work, Bear's shareholders shouldn't get $2 – they should get nothing.

Bear's stock is selling at more than $2 for two reasons – one is that the market evidently believes there is some chance for the deal to be busted, either by Congress or by shareholder rejection. And second, because Bear's bondholders are frantic to own the stock so they can vote for this lousy deal to go through. After all, buying up a few hundred million in stock to secure $75 billion of debt doesn't seem like a bad trade. Even if J.P. Morgan raises the bid for Bear Stearns, the assurances by the Fed and Treasury are not legal. That will change only when the "non-recourse" provision is withdrawn. Whatever happens, this is not over, for the simple reason that it is wrong.



The U.S. economy will get through this without the requirement of massive public bailouts. What is required, however, is that the stock and bondholders of financial companies take due losses. Customers and counterparties need not, and I expect will not, be harmed. The value of the shareholder equity and debt issued by most financial institutions is ample buffer. In general, writedowns against shareholder equity alone will be enough, provided that regulations are revised to allow institutions to continue servicing existing financial commitments on the basis of more flexible capital requirements.

If the market was “certain to crash” in the event that Bear Stearns failed, then the market is certain to crash anyway, because Bear Stearns wasn't the last shoe to drop – it was one of the first. Unfortunately, we're standing in a shoe store. Wasn't the market “certain to crash” without the Fed's surprise rate cut in January too? At what point will investors figure out that the liquidity problems are nothing but the precursors of insolvency problems? At what point will investors stop begging the government to save private companies and recognize that the losses should be taken by the stock and bondholders of the offending financial institutions? If the Fed and the Treasury are smart, they will act quickly to figure out how to respond to multiple events like we've seen in recent days, to expedite turnover in ownership and quickly settle the residual claims of bondholders, without the kind of malfeasance reflected in the Bear Stearns rescue.
 

Bastian Gross

German Mathquant
Deutsche Bank alone in Europe to bid for Bear Stearns

Hello non-European,


March 20:

Deutsche Bank was the only big European bank to bid for Bear Stearns in last week's fire sale, a press report said on Thursday, adding that it might get another shot as shareholders balk at the takeover by JP Morgan Chase.

The biggest German bank stayed in the bidding until late in the process, the business daily Handelsblatt reported, citing financial industry sources.
Over the weekend, JP Morgan Chase agreed to buy Bear Stearns for a bargain price of two dollars per share - far below their close on Friday of 30 dollars (S$41.6) - to avert a collapse of the 86-year old institution.
According to Handelsblatt, Deutsche Bank might still get a chance to buy Bear Stearns because shareholders in the US investment bank have staged a revolt against the cut-rate deal with JP Morgan Chase. The New York banking giant got backing from the US Federal Reserve for its rescue of Bear Stearns and shares in the investment bank closed on Wednesday at 5.33 dollars.
British billionaire Joe Lewis, a major shareholder, and former Bear Stearns chief executive James Cayne were now reportedly working to block JP Morgan Chase's takeover and might invite rival bidders to make fresh offers.
According to the Financial Times, Lewis and a number of Bear Stearns staff who own equity in the bank were set to vote against the JP Morgan Chase deal.
The New York Post reported that Lewis had contacted several investment funds and banks including Barclays, HSBC, Credit Suisse and Royal Bank of Scotland.


Deutsche Bank alone in Europe to bid for Bear Stearns: report
 
Bear Stearns bailout

I've read that the federal reserve is bailing out Bear Stearns, but I'm having trouble figuring out exactly what bailout people are talking about.

JPMorgan offered $2/share and has raised that to $10/share today. That sounds like a takeover to me. And I can't figure out what the fed has to do with it, other than initially instigating the deal.

A bailout implies the entity doing the "bailout" is pouring cash in. Is the fed actually giving tax payer money to Bear? If they aren't, then why are people saying the fed is bailing out Bear Stearns? If they are, then where is this money going to and who gets it?

Thanks!
 
I've read that the federal reserve is bailing out Bear Stearns, but I'm having trouble figuring out exactly what bailout people are talking about.

JPMorgan offered $2/share and has raised that to $10/share today. That sounds like a takeover to me. And I can't figure out what the fed has to do with it, other than initially instigating the deal.

A bailout implies the entity doing the "bailout" is pouring cash in. Is the fed actually giving tax payer money to Bear? If they aren't, then why are people saying the fed is bailing out Bear Stearns? If they are, then where is this money going to and who gets it?

Thanks!

I don't know all the details but the Fed will loan up to $30B with MBSs as collateral (which they would normally never ever accept).
A decent percentage of these MBSs will be worth zero and the Fed will loose
It's little risk to JPMC and a decent chunk to taxpayers.
 

Bastian Gross

German Mathquant
Bailout

I don't know all the details but the Fed will loan up to $30B with MBSs as collateral (which they would normally never ever accept).
A decent percentage of these MBSs will be worth zero and the Fed (and all of us) will loose
If the Fed would not have assumed this debt, JPMC would have never agreed to the takeover.

So it's little risk to JPMC and a decent chunk to taxpayers.
The Fed will offset the losses by printing money.
We all loose to inflation

Hi Giampiero,

But if the fed is *loaning* the money to JPM, that's a whole different story from bailing out. Loans need to be paid back, with interest. Using MBS as collateral simply means that should JPM default on the loan, the govt gets to keep the worthless paper. Like a pawn broker.

I have a hard time believing that JPM would allow itself to default on a govt loan --- they have their credit worthiness to think about. They'd default only if they absolutely had to.

Or am I completely crazy here?

Thanks!
 
The bailout is a short term solution organized by the Fed which used JPM as a conduit to give Bear cash. In a very short term, defaults rarely occur. The long term solution is a sale of Bear which exactly is what JPM is doing

The Fed operates something known as the discount window, which allows US commercial banks - high street banks in other words - to access funding at a given rate of interest.
Bear Stearns' position as an investment bank - servicing companies and other banks rather than individuals - means it does not have access to discount window funding.
Bear has therefore persuaded JP Morgan, a leading US commercial bank which has emerged relatively unscathed from the sub-prime mortgage meltdown, to act as a conduit for the Fed's bailout.
It works like this: Bear will pledge assets to JP Morgan which in turn pledges them onto the Fed. In return the Fed lends money to JP Morgan in lieu of those assets, which in turn passes the cash on to Bear.
The solution is short-term.
The funding is designed to be in place for 28 days, but the banks are looking for a longer term solution which it is believed could lead to a sale of Bear.
 
The bailout is a short term solution organized by the Fed which used JPM as a conduit to give Bear cash. In a very short term, defaults rarely occur. The long term solution is a sale of Bear which exactly is what JPM is doing

The Fed operates something known as the discount window, which allows US commercial banks - high street banks in other words - to access funding at a given rate of interest.
Bear Stearns' position as an investment bank - servicing companies and other banks rather than individuals - means it does not have access to discount window funding.
Bear has therefore persuaded JP Morgan, a leading US commercial bank which has emerged relatively unscathed from the sub-prime mortgage meltdown, to act as a conduit for the Fed's bailout.
It works like this: Bear will pledge assets to JP Morgan which in turn pledges them onto the Fed. In return the Fed lends money to JP Morgan in lieu of those assets, which in turn passes the cash on to Bear.
The solution is short-term.
The funding is designed to be in place for 28 days, but the banks are looking for a longer term solution which it is believed could lead to a sale of Bear.

Thanks. I had suspected it was something like this, but I couldn't find the details. It seemed like all the news outlets were focusing on how taxpayers were going to fund a "bailout of Wall street bank".

I think the media's usage of the term "bailout" in this case is disingenuous since it's a quasi non-technical term with a shadowy meaning, but has a very specific connotation for most people. Most people take it to mean "free money", but that's not the case here at all.

Can you recommend a good news site where I would've read about the details of the "bailout"? Who reported this story intelligently from a financial POV?

Many thanks!
 
Diary from a BS ABS banker

http://news.efinancialcareers.co.uk/NEWS_ITEM/newsItemId-13156

Living dangerously: Diary of an ABS professional, Week 16

25 March 2008
In which Mr ABS suggests Bear bankers start behaving like prisoners on Devil's Island.

I'd nearly recovered from the humiliation of kicked out of the bank with only beer money and had almost come to terms with having being paid absolutely no bonus for all my work in 2007, when along comes a total market collapse making the outlook for 2008 even more challenging.

My remaining shares in my old employer are now so low that if I could, I'd make them over to the newly freed Jérôme Kerviel to finish them off for good. At least this would provide me with some satisfaction.
Reputation in banking is everything. There are a lot of bad rumours circulating around and, as banks are highly leveraged businesses, any bad rumours can easily spiral out of control and turn into self-fulfilling prophecies. It's reassuring to see that the FSA and BoE acted promptly with the rumours surrounding BoS.
It was sad to see Bear Stearns losing its independence, even if JPMorgan has made a more generous offer. An earlier extension to investment banks of the liquidity available to commercial ones might have prevented the débâcle we've seen. I wonder whether the Bear structured finance dudes who were shown the door are still locked into their share plan or were able to sell them on redundancy.
Given JPMorgan's initial offer for Bear's shares was so low and employees own so high a proportion of them, it was inevitable they'd put up a fight. In their place I'd have been tempted to tell Dimon to shove his dollars where Papillon used to store his. Could they do better by forcing a liquidation? If I've reached the stage where seeing my old shop being Kervielled would be more enjoyable than selling my depleted stock, I can imagine their state of mind.
Last week's resurgence in Bear's shares was interesting. One explanation circulating around is that Bear's bondholders are buying in to increase the likelihood of the JPMorgan bid succeeding and their bonds being converted into JPMorgan bonds.
Has the market reached rock bottom? Last week we saw the most extraordinary stock rally, on the back of three banks posting bad results. Doom mongering might just have gone too far. I presume investment banks have started lapping up AAA paper at 300bps to repo it with the Fed. The Fed might just as well buy the paper itself to restore the liquidity. And as for bank stocks? They may yet rise again, but it won't compensate for my lost bonus.
 
3 one liners I heard recently :

a) "we are dating after marrying" : rumored to be some jpm executive about "integrating" business
b) "if you for the deal, you would call it a rescue; if you are against it, you will call it a bailout" : On Fed's role
c) "Even a dead cat bounces when thrown off a high cliff" : about bsc shares when they were higher.
 
does anyone think its worth buying Bear Stearns stock at $ 10.96 ? Will it go up anytime soon ? what are the risk guys
 
About 60 protesters opposed to the Federal Reserve's help in bailing out Bear Stearns entered the lobby of the investment bank's Manhattan headquarters Wednesday, demanding assistance for struggling homeowners.Demonstrators organized by the Neighborhood Assistance Corporation of America chanted "Help Main Street, not Wall Street" and entered the lobby without an invitation for about half an hour before being escorted out by police.
http://www.cnbc.com/id/23813173
 
What's the reason for such a protest?
mass insanity?

The bailout is a short term solution organized by the Fed which used JPM as a conduit to give Bear cash. In a very short term, defaults rarely occur. The long term solution is a sale of Bear which exactly is what JPM is doing

The Fed operates something known as the discount window, which allows US commercial banks - high street banks in other words - to access funding at a given rate of interest.
Bear Stearns' position as an investment bank - servicing companies and other banks rather than individuals - means it does not have access to discount window funding.
Bear has therefore persuaded JP Morgan, a leading US commercial bank which has emerged relatively unscathed from the sub-prime mortgage meltdown, to act as a conduit for the Fed's bailout.
It works like this: Bear will pledge assets to JP Morgan which in turn pledges them onto the Fed. In return the Fed lends money to JP Morgan in lieu of those assets, which in turn passes the cash on to Bear.
The solution is short-term.
The funding is designed to be in place for 28 days, but the banks are looking for a longer term solution which it is believed could lead to a sale of Bear.
put in these terms it actually looks, assuming there was simply no other solution but bankruptcy, like a rather elegeant scheme. Now wonder Mr. Cayne felt OK about spending the weekend playing bridge.

Wow, Andy. What is an "automerged doublepost?"
 
In his upcoming presentation Bernard S. Donefer will talk about credit derivatives and their reflection on the latest events. The lecture is held at Baruch on April 8th, details are below. Might be an interesting event to attend... :thumbsup:

[FONT=Arial, Helvetica, sans-serif]CDS's CDO's SIV's -- What are they?[/FONT]
[FONT=Arial, Helvetica, sans-serif] Special event in the Subotnick Center on Tuesday April 8th from 12:45 -- 2:00 pm. Everyone is invited, no registration required.

A presentation explaining credit swaps, collateralized debt obligations and off balance sheet financing. Learn what happened at Bear Stearns, Citi, the Carlyle Group. Understand the business headlines and their implications. The speaker is Bernard S. Donefer, Distinguished Lecturer and Associate Director of the Subotnick Financial Services and 35 year veteran of Wall Street.
[/FONT]
 
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