You probably noticed that the JPMorgan buy out deal of Bear Stearns has now been renegotiated with JPMorgan now agreeing to pay $10 a share as opposed to the $2 preliminarily agreed last week. The fact that the dollar price could expand fivefold so easily gives some graphic sense of how arbitrary some of these dollar amounts are or perhaps how little real sense people have of the degree of risk and value tied to these enterprises. But when I saw this change the first thing that occurred to me was whether we were able to pull any our of our (i.e., the public) money off the table when the deal for the Bear Stearns shareholders got dramatically sweetened. It seems that the answer is yes, to some degree at least. But the terms still seem a little unclear to me.
From today’s article in the Post comes this expanded detail …
As part of the new Bear Stearns deal, the Fed’s role was also renegotiated. The central bank originally had agreed to put public dollars on the line to guarantee $30 billion of risky mortgages owned by Bear Stearns. In the reworked deal, J.P. Morgan agreed to cover the first $1 billion in losses if the value of those securities falls, with the Fed responsible for any losses beyond that.
Presumably the idea here is that the substantial risk of loss is in that first $1 billion while the remaining liability is real but much less risky. So it becomes less a bail-out than a wisely deployed insurance policy on liabilities the Fed has some ability to gauge. But are they sure that’s true? I don’t have the financial knowledge to even begin to game out and answer. And even if I did I think I’d need some access to the company’s records to have any sense of what’s going on.
But let’s remember, as far as Bear’s shareholders are concerned, the company should have been allowed to fail and all those shareholders to be cleaned out. The logic of any level of bail out is that the collateral effects of the company’s collapse would be too damaging to the country’s financial sector. So any lifeline to the company’s shareholders is a secondary effect of the achieving the public good of financial sector stability. So before the Bear shareholders start recouping any of their losses I would think that the risk the public is on the line for from this deal should be reduced to little or nothing.
