After an outcry from Bear Stearns shareholders in the
takeover brokered by the Federal Reserve Bank, JPMorgan Chase has just upped
its offer from $2 to $10 per common share. But Bear’s shareholders, as well as
U.S. taxpayers, are still getting a lousy deal.
The deal is lousy not because of the share price offered —
although $10 a share still may be chump change for a company selling for $30
just before the deal was announced a week ago and more than $80 at the
beginning of the year.
Bear’s officially stated book value is also $84 per share.
Perhaps that is too high, but even if the book value were half that, $40 is
still four times higher than the $10 that Morgan plans to pay shareholders.
But the real reason the deal is so flawed is the
unprecedented government-sanctioned breach in corporate governance practices.
Shareholders, the true owners of the company, are being denied a voice in the
fate of the firm.
Forcing the merger of Bear with Morgan, which is basically
what the government did, and offering $30 billion in guarantees so there will
be very little downside risk for Morgan is a horrible long-term precedent for
the taxpayers, shareholders and the U.S. economy.
In this bailout, the government sided with creditors at the
expense of shareholders of Bear Stearns common stock. By forcing this fire
sale, the Fed ran roughshod over thousands of investors’ interests, and
whatever effects this has on the credit market, the precedent may do untold
damage to the retail investor market for equity in firms through common shares.
It’s Their Company
Investors may think twice about buying common stock given
this precedent of the government strong-arming shareholders into a bad deal.
The Morgan acquisition still has to go to a shareholder
vote, so despite impressions from the media, it is far from a done deal. Other
banks, brokerage houses and private equity firms reportedly have expressed
interest in acquiring all or part of Bear. But the government has made it
difficult for them to do so by giving Morgan the special backing of accepting
its mortgage-backed securities as collateral.
It’s not too late for the government to do right by
taxpayers and Bear shareholders. Now that the Fed is lending to investment
banks at the discount window — whatever the merits of that policy — there is
even less justification that this brokered deal is still needed to avert a
The government should withdraw its offer to Morgan to
guarantee Bear’s mortgage-backed securities, and at the very least, not ride
further roughshod over shareholders and Bear’s other potential suitors.
The government should do this not because Bear’s investors
have any sort of entitlement to a higher share price, but because they are
entitled, as every company’s shareholders are, to a voice in the running of
Shareholders, like creditors and bondholders, take different
risks when they bet their money on a company. As owners, shareholders reap more
returns when a company does well, but are the last in line — behind creditors
and then bondholders — when a company goes bankrupt.
But in this case, the government played favorites and backed
a deal that shielded creditors and others from risk by likely worsening the
result for shareholders. The justification that Bear was "too big to
fail" and default on it creditors doesn’t stand up to scrutiny. If
creditors knew that the government wouldn’t protect them from their own risks,
Bear likely wouldn’t have gone bankrupt.
If Bear were truly "too big to fail," then its creditors
would have a vested interest in keeping it from failing. They would negotiate
payment plans that would keep it solvent and able to repay them, albeit perhaps
a little slower than they would like.
Without a bailout, creditors probably would be "pressuring
each other not to flee . . . institutions like Bear," argued Manhattan
Institute financial expert Nicole Gelinas in The Wall Street Journal.
This is especially true given that the value of
mortgage-backed securities are in flux. Any value is an estimate because no one
knows how many loans in the securities will be repaid. But given that,
according to the latest National Delinquency survey, only 2% of mortgage loans
are in the foreclosure process, it’s a safe assumption that a good many loans
will probably be repaid.
Bear’s investors have every right to seek a better offer,
pursuant to company bylaws and the laws of the state where the company was
incorporated. The Fed and the Feds should not stand in their way. A freeze in
the rule of law is still much more dangerous than even a severe chill in the