skippy the bush kangaroo: whatever the market will bear stearns

Monday, March 24, 2008

whatever the market will bear stearns

the dow jones industrials continued their climb today, on reports of bear stearns stock price increase, due to the fact that jp morgan's offer to buy the broke brokerage house went from $2 to $10 a share. but business week wonders if that's good for taxpayers:

the renegotiated deal is bound to cause complaints that the nation's central bank has been sucked into supporting a partial bailout.

jpmorgan raised its all-stock bid to win the support of bear shareholders who were threatening to vote no and kill the deal. the new deal does have one feature that slightly betters the terms for the fed. jpmorgan is now agreeing to absorb the first $1 billion in losses if the collateral posted by bear for a loan turns out to be worth less than bear claims. the fed is on the hook for the remaining $29 billion, instead of the entire $30 billion as originally planned.

to be sure, the chance that the fed will actually lose money on the loan is fairly small because the bear assets were priced conservatively and are likely to recover in value eventually once the housing crisis is past. the fed can hold them for 10 years, or even longer if it chooses, waiting for them to regain value.

cbs marketwatch is even less forgiving:

for many analysts, the fundamentals of the transaction remain unchanged: gains on wall street are privatized while losses are socialized.

while j.p. morgan's agreement to cover the first $1 billion in losses is "a good first step ... the question is whether j.p. morgan is paying $10 a share for bear stearns or $10 per share in order to get the benefit of a $30 billion guarantee from the fed," asked dean baker, co-director of the center for economic policy research

"in other words, would j.p. morgan be willing to make the deal without the guarantee?" he asked…

but baker said regardless of the ultimate outcome, taxpayers should not have "to write a blank check." taxpayers should receive something in return for their funds, perhaps a limit on compensation for top executives of j.p. morgan, he suggested.

Labels: economy