After the Bear Stearns Bailout – Waiting for the Other Shoe to Drop?
Late Sunday night, in a conference room high up at the troubled investment bank’s Midtown headquarters, Bear Stearns allowed itself to be sold to JPMorgan at the fire sale price of $2 per share, in order to avoid impending bankruptcy. At $236 million for the extensive prime brokerage and clearing operations of the 85-year old investment bank, JP Morgan seems to have gotten a better deal on Bear Stearns than anyone can remember since the last Barney’s warehouse sale.
Indeed, some high flying hedge-fund managers have paid more for their vacation homes than Jamie Dimon, CEO of JP Morgan Chase paid for the entire Bear Stearns operation, including the bank’s Madison Ave headquarters, said to be worth at least a billion on its own.
The federal government not only blessed the transaction, but heavy-handedly shepherded it through the regulatory framework, as the Federal Reserve and Treasury department officials conferred with dealmakers on both sides of the equation and agreed to float a $30 billion credit line to guarantee Bear’s extensive trading obligations and hopefully stave off a credit market melt-down. However, the bailout leaves many consumers wondering when they will receive the same type of relief on their individual subprime mortgages, as the rug is pulled out from under them, and they default on their mortgages while waiting for their stimulus package checks to arrive in May (too little, too late?)
For a firm that traded at $170 per share as recently as January 2007, and was still hovering around $84 per share at the close of the 2007 fiscal year in November 2007, the old-school investment bank’s reversal of fortune is that much more stunning. However, trouble had been brewing for months at Bear, which was hit harder even that other investment banks, had written down billions in the wake of the sub-prime debacle and had untold billions more in subprime-related exposure.
On Tuesday morning, the post-Bear talk on Wall Street is … will another shoe drop? Investors are bracing for another volatile week in the markets, and there is concern that another run on a financial institution plagued by mortgage-related debt could touch off a wave of devaluation of financial firm assets. These fears are causing a serious crisis of confidence on Wall Street, amid the final realization that we are in an actual recession, and not just “tough times,” or “a hard spot,” as various White House representatives have euphemistically claimed.
One thing is certain – the classic moral hazard concern that financial actors will not behave in fiscally responsible, risk-minimizing ways if they expect to be bailed out of their mistakes applies to retail consumers and financial institutions alike.
