Were it not for the fact that they own a bank the folks at JP Morgan Chase would be laughing all the way to one over the deal they cut over the past weekend to acquire Bear Stearns in a shotgun wedding like transaction.
While the shotgun was being wielded by the government, doing business as the Federal Reserve, Morgan Chase hornswoggled the Fed into giving it a great deal and a very sweet dowry for getting Bear Stearns and its messy subprime portfolio mess off the street and out of sight.
At $2 for each outstanding Bear Stearns share, Morgan Stanley is paying $236 million for making what had been the nation’s fifth largest investment banking firm disappear. In the 52 weeks that preceded the start of its meltdown Bear Stearns stock sold for a high of $170 and a low of about $26 a share.
Among the assets that Morgan Stanley is getting is Bear Stearns’ Manhattan office building which alone is estimated to be worth $.1.4 billion. Therefore, were it not for the bad mortgage portfolio that goes along with Bear Stearns the deal would appear to be a very good one from Morgan Stanley’s perspective.
So what about the problem subprime mortgage portfolio?
If you go down a couple of items to the one I posted on Sunday as the deal was taking shape you will see the following:
“The $2 a share sale seems bogus and reminds one of the days that [problem] savings and loan institutions were being sold in shot gun transactions forced and overseen by the government. The buyer would take the ailing institution for some nominal price and the government would give the buyer some multiple of that price in a combination of (i) cash, (ii) guarantees of the acquired institution's bad and questionable loans (and also pay the buyer for administering those loans), and (iii) waivers of certain regulatory requirements and restrictions.”
Well lo and behold, it now has been revealed that the Fed has guaranteed the problem portfolio to the extent of $30 million, meaning that it – in reality you and I and our fellow taxpayers -- and not Morgan Chase will bear the first $30 million in losses from the Bear Stearns subprime mortgages.
The S&L transactions supposedly reduced the payout by a government agency which insured S&L deposits. There is no such insurance and hence no similar rationale in the case of investment banking firms.
There is no way of telling whether there are any additional terms of the JP Morgan Chase – Bear Stearns transaction that have not yet been revealed, or, if there are, whether and when they will be made public.
In the meantime, J.P. Morgan Chase deserves a congratulatory tip of the hat. And I’ll leave to you the question of what the fed and the government deserve.