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Sunday, March 16, 2008 7:24 PM


PUT Buyers Celebrate Bear Stearns' Demise


Buyout terms have been announced. The Wall Street Journal is reporting J.P. Morgan to Buy Bear Stearns.

J.P. Morgan Chase agreed to buy Bear Stearns for $2 a share in a stock-swap transaction, people familiar with the matter say. J.P. Morgan will exchange 0.05473 shares of its common stock per one share of Bear Stearns stock. Both boards have approved the transaction.

Indeed, the Fed is taking the extraordinary step of providing special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.

The deal values Bear Stearns at just $236 million, based on the number of Bear shares outstanding as of Feb. 16. At the end of Friday, Bear's stock-market value was about $3.54 billion.

One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets -- such as its prime brokerage business that caters to hedge funds -- Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm's exposure, said people familiar with the matter.

Any deal would all but wipe out Bear Stearns shareholders, whose shares have not traded below $20 since 1995. The pain would be most acute for Bear's own employees, who were seeped in a culture of firm ownership -- and own about a third of the outstanding shares.
Press Release

The Press Release fills in a few more details.
JPMorgan Chase & Co. (JPM) announced it is acquiring The Bear Stearns Companies Inc. (BSC). The Boards of Directors of both companies have unanimously approved the transaction.

The transaction will be a stock-for-stock exchange. JPMorgan Chase will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock. Based on the closing price of March 15, 2008, the transaction would have a value of approximately $2 per share.

Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations.

In addition to the financing the Federal Reserve ordinarily provides through its Discount Window, the Fed will provide special financing in connection with this transaction. The Fed has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

“JPMorgan Chase stands behind Bear Stearns,” said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase. “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

JPMorgan Chase will host a conference call today, Sunday, March 16, 2008, at 8:00 p.m. (Eastern Time) to review the acquisition of Bear Stearns. Investors can call (800) 214-0745 (domestic) / (719) 457-0700 (international), with the access code 614424, or listen via live audio webcast.

The live audio webcast and presentation slides will be available on http://investor.shareholder.com/jpmorganchase/presentations.cfm under Investor Relations, Investor Presentations. A replay of the conference call will be available beginning at 11:00 p.m. (Eastern Time)on March 16, 2008, through midnight, Monday, March 31, 2008 (Eastern Time), at (888) 348-4629 (domestic) or (719) 884-8882 (international)with the access code 614424. The replay also will be available on www.jpmorganchase.com.
The Fed provided $30 billion funding to JP Morgan, but that will have to be paid back. What seems likely is JP Morgan will have to sell enough of Bear's assets to cover any losses on Bear's illiquid garbage. If that is not enough, then perhaps the Fed is on the hook.

S&P Futures spiked up on the news and were +12 or so but are now hugely red at -18 and falling. I am wondering if any put sellers get wiped out by this. Anyone short huge numbers of puts and not 100% hedged with shorts is in trouble.

A week ago I noted Bankruptcy Fears In Bear Stearns Options. For all practical purposes, this is bankruptcy. One thing is for certain, Bear Stearns PUT buyers are going to be celebrating Monday.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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