It seems that the parties involved in JPMorgan’s (JPM) takeover of Bear Stearns (BSC) like to work on the deal on holidays, Sundays, and when the Moon is Void-of-Course.*
Here’s the bear facts about the “amended” deal between JPM and BSC. If The Wall Street Journal timeline is accurate, Bear’s Board of Directors couldn’t possibly have fully read the deal before agreeing to it, since CNBC announced it was approved just after the market opened this morning.
JPM raised its offer to BSC shareholders from $2 to $10 a share. (BSC shareholders will exchange 0.21753 shares of BSC stock for JPM stock.) I’m sure investor Joe Lewis, who owns 12 million shares at an average price of $104 ($1.26 billion), is overjoyed at JPM’s generous new offer.
Bear will offer 95 million newly issued shares of its common stock (39.5% of shares outstanding) for JPM to purchase at $10 a share. New York Stock Exchange rules normally require shareholder approval of shares that are convertible into more than 20% of a company’s shares. However, JPM got the NYSE to grant an exception under their rule that a delay would “seriously jeopardize the financial viability of the listed company.” The closing of the share sale is expected to be completed by April 8, 2008. These shares should not be issued with voting rights. JPM is basically buying votes FOR FREE! Once the deal goes through, Bear’s coffers become the property of JPM.
Bear’s Board of Directors is on board to approve the merger. Bear CEO Alan Schwartz said: “The share issuance to JPM was a necessary condition to obtain the full set of amended terms, which in turn, were essential to maintaining BSC’s financial stability.” But Alan, you and the other Bear executives emphatically told the world as late as the 12:30 PM March 14 conference call that with the Fed’s 28 day loan, everything would be fine. One wonders what Bear’s board was secretly promised to buy their vote. Perhaps taking $10/share is worth it to be indemnified against shareholder lawsuits.
In a statement released this morning, the New York Federal Reserve said that upon the closing of the merger it will provide $29 billion in term financing to facilitate JPM’s acquisition of Bear at the Fed’s discount rate (2.5%). Investment management firm BlackRock (BLK) will manage the portfolio. If Bear’s $30 billion valued assets (as of 3/14/08) lose value, JPM will bear the first $1 billion of losses. Any realized gains in the portfolio will accrue to the New York Fed.
The Fed statement also said that “This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning.” In the past week it has become quite clear that both the Fed and the Treasury knew on March 14 that the temporary loan was a ruse to keep the market calm so a scheme could be prepared over the weekend. Or as Treasury secretary Paulson said, “before Asia opened” on March 17.
Last week several media outlets were sounding very metaphysical in describing Bear’s situation. From Bear’s “near death experience” (Financial Times) to Bear’s “karma” (Wall Street Journal), it was all very plutonian – relating to Pluto, the planet ruling death and resurrection (reincarnation). With Pluto in Capricorn, the sign of the government and high finance, you would expect all kinds of secret shenanigans to take place to manipulate a sad situation into someone else’s gain.
This winding road leads to the Treasury secretary’s doorstep. Paulson wants to burnish Bear’s karma in front of the world, as Bear was the only investment bank who refused to bail out hedge fund Long Term Capital Management in 1998. The karma of Paulson, the White House, and the Fed is entwined in hypocrisy when other investment banks have lending facilities previously only available to the major banks, but are exempt from their rules. Now that the Fed has stretched their financial jurisdiction beyond its limits, “moral hazard” has come full swing back to its source.
*When the Moon (our emotional barometer) does not form any relationship to a planet before entering a new zodiacal sign. This time period is best suited for anything where NO ACTION OR OUTCOME is desired, as actions taken during the VOC period may not turn out as planned.
Related Posts: “JPMorgan’s Bogus Bear Deal” and “Bear Stearns: The Bare Facts”