Anyone who argued last week that the Fed-brokered deal in which JPMorgan bought Bear Stearns at the bargain-basement price of $2 per share was not a bailout woke up Monday morning and discovered that, er, well, perhaps it was time to rethink that position. Late Sunday night, the New York Times reported that JPMorgan was in negotiations to raise the bid price to $10 per share. Voilà -- a stroke of the pen, and Bear Stearns is worth a billion dollars, instead of $274 million. Guess somebody heard all those Bear Stearns shareholders who were screaming they wuz robbed.
Popular sentiment against allowing the irresponsible investment bankers who got us into this mess to walk away from the multicar pileup without heading straight to the stockade has been high, and naturally so. But at a $2-a-share price, the Bear Stearns employees who had their life savings invested in Bear Stearns stock were not getting a handout. They were getting crushed.
Now that calculus has changed. As the Times observes, "The central bank ... directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued ..."
There are at least two ways to look at this. The first comes from Calculated Risk, which notes that JPMorgan has already put a total price tag on the deal of $6 billion, which includes the costs of integrating the two companies, any litigation arising from the deal and possible write-downs of Bear Stearns assets. With the new share price, the total cost of the merger only jumps up to $7 billion. Not such a big deal from the JPMorgan point of view.
But Naked Capitalism takes a more aggrieved tone that is likely to mirror popular, and congressional, reaction:
If JPM does increase the price beyond a token amount, like a dollar, expect there to be a firestorm of criticism of the Fed allowing a payout to a failed firm. Either JPM should buy Bear free and clear, with no government support, or the shareholders should be wiped out, or as close to that as the practical constraints allow.
The U.S. stock market loved the news in early trading Monday morning. And why not: No matter how badly these guys screw up, someone stands ready to lend them a helping hand.