Jun 1

Written by: Russ Henke
6/1/2008 10:23 AM 

The most recent blog entry in this space dealt with Topic #4 from the following May 29 news list:

   1. Scott McClellan’s new memoir about the Bush 43 White House
   2. Bear Stearns disappearing into JP Morgan Chase
   3. SPAM sales on the rise
   4. Q1 GDP being revised up from 0.6% to 0.9%

Today we’ll tackle Topic #2.

On May 29, 2008, Bear Stearns and JPMorgan Chase announced that the stockholders of Bear Stearns, at a special May 29 meeting, approved the merger with JPMorgan Chase. Approximately 84% of shares voted in favor. The merger closed on May 30, 2008. Each outstanding share of Bear Stearns common stock was converted into 0.21753 shares of JPMorgan Chase common stock, and Bear Stearns became a subsidiary of JPMorgan Chase. Also, the NY Federal Reserve Bank and JPMorgan Chase agreed that they will complete the previously-announced sale of $30 billion of assets by subsidiaries of Bear Stearns and the related financing on or about June 26, 2008, a time period “to help ensure the smooth transfer of this large portfolio.”

Ho-hum…just another smooth and uneventful Wall Street deal? Well, not quite.

Lest we forget, in this deal, Bear Stearns shareholders are receiving only a measly $10 a share for a stock was worth some $154 per share only 12 months ago. Also, keep in mind that some 7000 Bear Stearns employees will have lost their jobs in the process

Not that Bear Stearns itself was not culpable. In 2007, as part and parcel of the wide-ranging atmosphere of relaxation of financial regulations by Washington, two of Bear Stearns hedge funds got into trouble with heavy investments in subprime mortgages, forcing billions in write-offs. Then this year, rumors of Bear Stearns poor cash position drove it to near bankruptcy.

Bear Stearns of course was not alone; indeed, since 2007, investment banks around the world have been similarly forced to write down almost $250 billion of debt. In the US alone, nearly 65,000 people have lost jobs at banks, brokerages and mortgage companies in the past 10 months, to say nothing of the general havoc the overall subprime fiasco has caused across the entire US economy.

So what was different about Bear Stearns? Why did the US Federal Reserve suddenly decide to intervene and quickly orchestrate its sale to JP Morgan Chase? The Fed’s Bernanke said his intervention was solely to prevent fallout from Bear Stearns possible failure from “hurting the rest of the global financial system.”

Others disagree. They say the Fed’s intervention sets a dangerous precedent. Where will such interventions stop? How many other similar bailouts by the US government (read over-burdened US taxpayers) will be needed?

The approval of the Bear Stearns merger on May 30, 2008 will not end this story. Also, there are rumors that the SEC is launching an investigation; so we’ll watch to see what if anything results.

Moreover, another, perhaps more lethal danger is emerging. The possible failures of some “standard” US banks in the months ahead. But that’s the subject of a future blog entry.