Bear fetches a better price, shoring up deal

Times Staff Writer

Hoping to quickly seal its government-backed takeover of struggling brokerage Bear Stearns Cos., banking giant JPMorgan Chase & Co. on Monday said it would pay five times its original offering price for the firm and shift $1 billion of risk in the deal from the Federal Reserve’s shoulders to its own.

The unprecedented and controversial rescue of Bear Stearns, originally crafted during emergency negotiations on the weekend of March 15-16, appeared to be in jeopardy last week because of intense opposition from major Bear Stearns shareholders and doubts among some of the brokerage’s clients and trading partners.

It took a second weekend of intensive care from the Fed and the Treasury Department to set the deal back on course.


The rescue, largely financed by the Fed, has triggered cries that the central bank was putting taxpayers at risk to bail out Wall Street -- and that the arrangement would only encourage other financial firms to dabble in dicey securities such as the mortgage-related investments that nearly did in Bear Stearns.

“It’s sort of like, heads you win, tails the Fed picks up the pieces,” said Harvard University finance professor Josh Lerner.

Regulators have defended the deal as necessary to avert a potential calamity in the financial system that could have been caused by the collapse of the 85-year-old investment bank.

JPMorgan’s revised offer was meant to defuse opposition from angry Bear Stearns shareholders and blunt attacks on the Fed’s involvement, analysts said.

The criticism continued on both fronts Monday, but at least the stock market applauded.

News that JPMorgan would raise its stock-swap offer to the equivalent of $10 a share from an initial $2 helped ignite strong gains in share prices by allaying fears the deal might fall apart, which could have led to the abrupt liquidation of Bear Stearns.

The Dow Jones industrial average closed up 187.32 points, or 1.5%, at 12,548.64, its highest level since Feb. 28.

Broader stock market indexes were up even more sharply. The market’s strength also was underpinned by a report showing that sales of existing homes unexpectedly rose 2.9% in February from January, snapping a six-month string of declines and raising hopes that the worst of the housing slump might have passed.

Bear Stearns shares shot up $5.29, or 89%, to $11.25, well above the new bid, on some investors’ views that a still-higher price could emerge. JPMorgan shares added 58 cents to $46.55.

Bear Stearns suffered a huge financial drain the week of March 10, when some of its trading partners decided that the company’s soured mortgage investments could leave it unable to make good on its obligations.

They demanded that their trades be liquidated, sapping the firm of cash. That led the Fed to step in and engineer an emergency loan to the company on March 14 -- and the shotgun wedding with JPMorgan that weekend.

Initially, the Fed had agreed to lend JPMorgan $30 billion as part of the deal and accept as collateral a $30-billion portfolio of Bear Stearns’ most troubled mortgage-related investments, which have been tainted by soaring home loan delinquencies.

The hope was that, with Bear’s mortgage portfolio under what amounted to a federal guarantee -- and no longer a threat to a market already saturated with depressed home-loan-backed bonds -- Wall Street would recover its confidence in mortgage investments.

That, in turn, could ease the housing-centered credit crunch that has been hurting the economy since August.

Under the revised plan announced Monday, the Fed cut a slightly tougher deal. It still is taking control of $30 billion of Bear Stearns’ assets, which will be managed for the central bank by investment firm BlackRock Inc.

But instead of the Fed retaining all the risk of loss on the portfolio, JPMorgan agreed to absorb the first $1 billion of any losses. The Fed is on the hook for the rest.

The portfolio was valued at $30 billion as of March 14, after much of the decline in the value of mortgage securities already had occurred, New York Fed spokesman Calvin Mitchell said Monday.

With the $1-billion cushion and a 10-year time horizon, he said, the Fed believed it could at least recover its money, if not turn a profit on the assets.

A Treasury spokeswoman on Monday repeated the Bush administration’s defense of the arrangement, saying that “an orderly transition of Bear Stearns is in the best interest of our financial markets.”

Even so, the deal sends a bad signal, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

Noting that Bear Stearns’ shares were trading at $86 as recently as Feb. 25, Baker said the agreement was “not a bailout of Bear Stearns management or shareholders, who will, after all, lose a lot of money.”

The main beneficiaries, he said, were other brokerages, banks and investment firms that own troubled mortgage securities.

“It’s a bailout of all the other investment banks that hold those instruments,” Baker said.

By agreeing to pay about $1 billion extra for Bear Stearns in stock and taking on an additional $1 billion in portfolio risk, JPMorgan got something important in return: a virtual guarantee that it would complete the deal by April 8.

The new terms enable JPMorgan to buy 95 million newly issued Bear Stearns shares, giving it 39.5% of the company.

Along with shares held by Bear Stearns directors, who endorsed the takeover, it should be enough to carry the required majority vote of approval by shareholders.

It was in the Fed’s interest to hasten the deal as well. Stretching it out for months would have added to the uncertainty and strain on the already stressed financial markets, the Fed spokesman said.

Bear Stearns’ directors, in approving the deal, have said the alternative was bankruptcy.

The stock market judged there to be one sure winner in the Bear Stearns portfolio’s workout program: BlackRock, which the Fed hired to manage and eventually liquidate the assets.

BlackRock’s shares surged $18.43, or 8.9%, to $224.53.