Tuesday, March 18, 2008

Bears Stearns: The Grisham Version

Secretary Paulson was on "Good Morning America" asking viewers if they thought Bear Stearns shareholders got bailed out. Main Street is wondering. The Feds have opened up $660 billion to financial institutions, while homeowners get a 800 number to call. But maybe Bear Stearns played the best hand it got. And it remains to be seen how this plays out.

We know that JPMorgan is locked into Bear's business. How did this come about? The Fed needed someone to handle Bear's derivative business. So they had to turn to JPMorgan who has notional derivative contracts of $92 trillion, about 74x the 1.2 trillion of assets they boast. But they had the "balance sheet" that Bernanke wanted. Because any of their problems, if they exist, exist in the notional land of derivatives.

So Dimon gets the Fed to take $30 billion of Bear's securities. Why wouldn't JPM be "locked" into Bear Stearns? All the risk is off the table. It has been transferred to the Fed. And to pretend it isn't a bailout of the banking system, Bear Stearns shareholders get just $2 a share. Now Treasury Secretary Paulson can proudly pontificate Bear's shareholders suffering proves there wasn't a bailout. There is no "moral hazard" as Bear shareholders get sacrificed.

So Dimone can brag how he got a good deal. Paulson can brag that Treasury didn't bail out Bear. And Bernanke can be brag that he saved the counter parties. The hedge funds can brag about the puts the bought and how they then yanked their business, hastening the run on the bank, and Bear's demise. And their won't be any tears shed on Wall Street for Bear shareholders, because 10 years ago, they didn't play ball in the bailout of Long Term Capital. And Bear burned while Jimmy Cayne played bridge. Wall Street justice has been done.

Or is it?

Why did JPMorgan get an option on Bear's downtown building? And why did they need an option to buy almost 20% of the shares at $2?

The run pushed Bear on the brink of insolvency. But the Fed's $30 billion took Bear's problems away. Now shareholders can just vote down the deal. And see how much more they are going to get.

The only thing that we know now is that Bear Stearns isn't toast, but the $2 bid for the shares is. And that Jamie Dimon, was bragging yesterday that Bear would add a billion to their earnings.

Does anyone remember listening to JP Morgan's third quarter conference call in 2006 crowing about the $750 million they made for buying Aramanth's energy portfolio of natural gas positions, when they had "margin calls" and were forced to liquidate? Who was their prime broker that gave Aramanth the margin call that forced the liquidation?It was JP Morgan, who were able to buy this "distressed" merchandise and sell it two weeks later to Citadel for almost a billion dollars of profit.

Maybe the only way out of insolvency was for Bear to agree to a $2 a share buyout, knowing that the deal would be voted down. And that, they would eventually pay Bear more, when the "moral hazard" argument isn't in the public eye, because who wants to litigate this?

It would eat in Dimone $6 billion reserve for "litigation" expense. And the Fed isn't paying that!

So they'll pay Bear shareholders more. And then Jimmy Cayne can keep both his condos in The Plaza.

He just won't smoke pot in the expensive one!

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