After secret discussions Sunday, it was announced early today that JP Morgan would pay $10 for every share of Bear, instead of the initial offer of only $2 per share.The reason given for the new deal is that it is fairer to the shareholders and the employees of Bear.The Fed was reportedly hesitant about backing the deal as it would invite renewed criticism that taxpayers money was being used to bail out greedy financial institutions. But at the same time the Fed did not want to appear to be opposing a fair deal for Bear investors and employees.
Rumors of a fresh deal had been doing the rounds of the market last weekend, and the Bear stock had closed the week at $5.96 on expectations of a better bargain. It was also rumored that Joe Lewis, the largest shareholder in Bears was in talks with other financiers to make a rival bid. Many shareholders felt that if they blocked the deal and sent the firm into bankruptcy protection they may get much more than $2 a share from creditors.Now with the new deal having been approved by the respective boards of both Bear and JP Morgan it remains to be seen what Mr. Lewis will do next.
Another rumor doing the rounds is that JP Morgan stands to make a killing on the deal, as the real value of Bear is much more than the price offered.Why would JP Morgan pay an extra $750 million, they argue?
Such rumors will continue till the real reasons for the take over of Bears by JP Morgan become known. Of particular interest will be the role of credit default swaps in the buyout. Credit default swaps are basically insurance purchased by lenders to institutions such as Bears, to guard against loss of capital.The system, developed in the 1990's was working fine in periods of stability.But things have changed in the last two years, since the sub prime issue surfaced. This market has grown from about $10 trillion to more than $45 trillion in this short period. The total value of the bonds insured against default is only about $5.7 trillion. There is a huge private market out there where buyers and sellers of insurance are betting on the survival or failure of companies. The big commercial banks are major players in the market. Interestingly, JP Morgan Chase is the biggest player with$7.8 trillion and Citibank is next with $3 trillion.It would be interesting to find out about JP Morgan's exposure to Bear Stearns debt, and whether it stood to lose or gain in the event of Bear's collapse