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Monday, March 17, 2008

JP Morgan Buys Bears Stearns: Assets Less “Liabilities”

The shocking news that JP Morgan is buying Bear Stearns for the price of $2 per share has many people scratching their heads. Currently Bear Stearns stock isn’t even trading that low. However if you examine the amount of litigation costs and arbitration claims that JP Morgan inherits, it seems a little more reasonable. JP Morgan has announced it had to set aside $6 billion “pretax for litigation, losses on sales of Bear assets and back-office and other consolidation expenses.”

In my mind, Bear Stearns’ spectacular fall underscores the firm’s reluctance to cooperate with other Wall Street brokerages and its unreasonable treatment of investors. Bear Stearns famously neglected to cooperate with the bail out of Long Term Capital Management (LTCM). And more recently, after the firm’s two now collapsed hedge funds were discovered to be on the brink last summer, Bear Stearns stonewalled all attempts by its lenders to inject liquidity into the spiraling funds.

Ironically, it was J.P. Morgan Chase that encouraged Bear Stearns to act, according to a meeting recounted by a Wall Street Journal story from last June:

An hour and a half into the meeting, John Hogan, head of risk management for J.P. Morgan's investment bank, raised his hand. "With all due respect, I think you're underestimating the severity of the situation," he said to Mr. Cioffi and his boss, Bear Stearns Asset Management Chief Executive Richard Marin, according to people who were there. The funds "needed to figure out" how to meet their margin calls, he said, and if that meant bringing in funding from the parent company, "we recommend you do that."

Many attendees were puzzled by Bear's apparent unwillingness to bail out the struggling fund, according to people who were there. After the meeting, these people say, there was sympathetic talk about Mr. Cioffi, a loyalist to the firm who seemed to be getting no help in return, and grumbling over memories of the Long-Term Capital Management crisis.

That afternoon Steve Black, J.P. Morgan's co-chief of investment banking, put in calls to Bear co-presidents and chief operating officers, Mr. Spector and Alan Schwartz. "Is Bear going to stand behind your asset-management company?" he asked Mr. Schwartz, according to people who were briefed on the conversation. Mr. Schwartz said he'd get back to Mr. Black.

An hour later, he called and said that on the advice of Bear's lawyers, the firm wasn't going to get involved, these people said. A spokeswoman said Mr. Schwartz couldn't be reached for comment.

Given its historically self-interested approach to investor crises, this deal could be a positive for individuals with arbitration claims against Bear Stearns such as Zamansky & Associate’s clients. At the least the buyout avoids a Bear Stearns bankruptcy.

Perhaps at most, J.P. Morgan may not have the same motivation to impede investors from recovering losses due to the unscrupulous management of the hedge funds that we now look back at as the beginning of the end for Bear Stearns.

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