March 25, 2008
The Fed, the Treasury and the Bear Stearns Deal
Two government units, the Treasury and the Fed, are negotiating the JP Morgan buyout of Bear Stearns. This should give us great pause. First Paulson has agreed to write a $29 billion credit derivative swap on Bears risky mortgage backed securities for free. In essence he is granting JP Morgan what would have been the fee on the swap, a sizable amount. The deal, unless offered to all potential buyers (and we do not know who Paulsen had included in the selective group of offerees), stops any competitive bidding market for Bear Stearns. The Treasury has, in essence chosen the buyer. Second, Bernanke is setting the price. With Treasury offering up a cash induced to do the deal at issue is how the inducement is split among the lucky players -- what do the Bear Stearns shareholder get of this largess? Bernanke apparently did not like the price at $2 a share and negotiated for $10 a share for the Bear Stearns shareholders, giving the shareholders a larger piece of the Treasury's surrogate cash grant.. So, after the Treasury choose the price, the Fed has chosen the price. Moreover, he delayed telling Bear Stearns about his intent to lower the discount rate on funds that investment banks can now borrow (this also is new) from the Fed until after the contract was initially inked. Bear Stearns could have used the window to borrow money to keep afloat a bit longer to negoitate a higher price or to encourage other bidders. This heavy- handed manipulation of a buyout of the country's fifth largest investment bank ought to raise eyebrows all throughout the financial community. Do we want Treasury and the Fed using such a heavy hand to structure the operating side of the financial markets? I do not. What's next, one has to wonder? The feds had better develop a principle fast for when to get into the business of restructuring financial institutions beyond the caterwauling of "impeding doom" by wall street insiders. The feds will find that appeals to them to "do something" by anyone facing financial loses will now step up considerably. What a mess.
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I agree, what a mess. This is all very perplexing, wouldn't it have been just as easy for the Fed and Treasury to back the deal while maintaining a competitive bidding process? It appears that Morgan was handpicked to the exclusion of all other bidders. I don't see any advantage gained by curtailing competitive bidding.
Posted by: Ben C. | Mar 26, 2008 10:02:46 AM