Bear and moral hazard
Financial Times
Monday Mar 24 2008 14:45
A week ago everything was binary. If Bear Stearns (NYSE:BSC) went
under there was a huge systemic risk for financial markets. If not,
order could be restored. Meanwhile, if Bear imploded, its shares were
worthless. Under the rescue terms from JPMorgan and the Federal
Reserve, however, they have significant value. Indeed, now, as a
solvent business, Bear is worth a lot more than the $2 a share imposed
on it during a shotgun wedding with JPMorgan. Once markets returned
from the brink, it also became clear that JPMorgan, as it rushed to
sign the deal, did not tie up all the loose ends. And by engineering
such a lowball offer, JPMorgan gave Bear shareholders a credible
argument that they had nothing to lose by voting the offer down.
JPMorgan blinked. Quintupling its offer still leaves Bear cheap. And
JPMorgan has done its legal work better this time - with a clear right
to buy 39.5 per cent of Bear for $10 a share. But that will face legal
challenges and, now that investors have sensed weakness, they will try
to push the price yet higher.
Where does this leave the Fed? Outwardly better off. Under the new
deal, JPMorgan guarantees the first $1bn of losses on the $30bn of
illiquid Bear assets the Fed originally took on. But it also means
that the Fed loses its sacrificial Bear. Its intervention has given
shareholders $10 a share instead of zero. (Lehman shareholders did
even better from the Fed. Lehman's shares soared from their lows in
large part because its future was guaranteed by the Fed's decision to
give investment banks access to the discount window.)
Moral hazard is returning to the fore. When the smoke clears, the Fed
must get its pound of flesh by regulating Wall Street, and doing it
more aggressively, to make sure this never happens again.
http://us.ft.com/ftgateway/superpage.ft?news_id=fto032420081555375255
|
