| Fed Makes a Gift to JPMorgan |
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| Written by David Neubert | |
| Monday, 17 March 2008 | |
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I bought Bear Stearns (BSC - $4.68 - down 85%) on Friday for $33.00. I thought there would be some kind of rescue package. I was wrong. Here, Portfolio.com blogger, Felix Salmon summarizes some of my comments and those by others. Instead, what I got was The Fed exacting their revenge on Bear at my expense. I also benefited by the gift that the Fed gave to JPMorgan (JPM - $40.01 up 10%). Basically, what has happened is that the market (and I) didn't expect the government to play favorites and give such a valuable asset away at the shareholders' expense. Did Bear Stearns deserve to go away? I don't doubt it. It would seem they didn't understand their own risks and didn't treat others nicely. As someone who competed against and interviewed a couple times at Bear Stearns over my career, I think I have a fairly common opinion of the firm. They were not very good citizens in Wall Street. For example, as a free rider they did not pitch in on the 1998 rescue of LTCM, though they did benefit. They culture at Bear Stearns was one of extreme self interest, which promoted chaos. I know several employees at Bear who are wiped out. Stock vesting at Bear Stearns was cliff vesting over three years. This means that had to stay with the firm for three years to get your stock. Compensation at Bear (and most of Wall Street) is between 25%-65% in stock. So we are looking at a least a year's worth of earnings for many Bear Stearns employees being transferred to JP Morgan shareholders. I feel bad for these guys. They weren't expecting this. I know many others may not feel bad for this unlucky group. They are very employable and it's hard to get anyone to feel bad (except for the Bush administration) for millionaires getting pay cuts.  Photo:Photobunny, Creative Commons, Flickr Bullish Note For Class Action Lawyers: Who do you sue in the obvious coming shareholder lawsuits? The board of Bear? JP Morgan for predatory lending? The Federal Reserve? As I mentioned on ThePanelist.com, I think that I and other Bear Stearns shareholders would have preferred a liquidation or market solution. Right now I'm trying to figure out what other banks are BFF (Best Friends Forever) with the Fed, like JP Morgan, so that I know who will get the next gift. Now, if that liquidation would have caused financial collapse of the entire banking and payments system the Fed is right to step in. Bankruptcy of an investment bank, yes. Financial collapse? I don't know, I wasn't at the negotiating table and I didn't have access to the liquidity position at the funding desk of Bear. Oh and if you are interested in some more stinkyness around this entire Bear Stearns/JPMorgan deal, look at TheStreet.com trying to figure out who traded disaster put options on half a million shares of Bear last week. Disclosure: I own BSC. Yes, I took a hit on a trade I did Friday afternoon. I had it right that a rescue was coming but wrong at the form. I own JPM. Site Disclaimer. BSC 
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David Neubert 
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Comments
(2)
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written by Adam Waitt , March 17, 2008
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written by Jeanne Roberts , March 24, 2008
Excellent, Mr. Neubert! Some have said the same, but yours is a voice of reason in a sea of outrage, and more people should be listening. As for the fallout, and subsequent class action suits, I'm afraid the Supreme Court will move to block them citing the Fed as a legal arm of government (which it is not). After them, who is left with enough deep pockets to take the hit and not go under as well? I honestly wish I knew.
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...wait... I mean the exact opposite...
I'm sure the Fed is BFFs with many banks, which breeds corruption. We always hear about the atrocities of EVIL corporations but in reality its the power and special favors delegated by the federal government that causes the corruption. This Bear Stearns fiasco is another prime example of the symptoms of a government managed economy.