“A week is a long time in financial markets,” said Anthony Currie on Breakingviews. A few days ago, near-bankrupt Bear Stearns, which had threatened to trigger a meltdown on Wall Street, was deemed worth $2 a share when it agreed a fire sale to JPMorgan for $236m, while the Fed would guarantee $30bn of Bear Stearns’ mortgage-related securities.
But JPMorgan has now offered $10 a share, or $1.2bn in stock, to head off a revolt by leading shareholders who claimed the initial offer was derisory, and to improve its chances of clinching the deal. It will also buy 29.5% of newly-issued Bear Stearns shares, leaving it close to the majority of shareholder votes required.
What next?
The best case for JPMorgan is that “financial markets recover some poise” and Bear Stearns’ brokers and big customers don’t defect, as Patrick Hosking said in The Times. The worst is that the value of the assets JPMorgan has agreed to take on dwindles – it could end up with a Bear Stearns business worth less than nothing, said Anthony Currie on Breakingviews – and JPMorgan, as agreed in the new deal, has to stump up for the first $1bn of losses on the $30bn underwritten by the Fed.
Meanwhile, the one party that “does seem to have got the fuzzy end of the lollipop is the Fed” – US taxpayers are still on the hook for $29bn, said Hosking. And at $2 a share, the rescue didn’t amount to a bail-out for Bear Stearns’ shareholders, as The Wall Street Journal pointed out; at $10, “that’s a harder argument to sell”. Moral hazard is “returning to the fore”, said Lex. “When the dust settles, the Fed must get its pound of flesh by regulating Wall Street… to make sure this never happens again.”
Why the crunch will continue
Market confidence has been bolstered by the Fed overseeing a rescue of Bear Stearns. But that and its various measures to improve liquidity won’t solve the credit crisis – note that interbank lending rates have kept rising, showing that banks are still hoarding cash. The worry is that some banks may be forced into insolvency as the value of their securities slide.
This depends on “everything from mortgages to credit-card debt”, which in turn depends on the path of the US economy and foreclosures in the housing market, said The Economist – “and none of these things are looking good”.
This week consumer confidence hit a five-year low, with optimism over the economic outlook at a 34-year low, while the slide in the S&P Case-Shiller index tracking house prices in 20 major cities has accelerated: prices were down 10.7% year-on-year in January. The credit crisis is far from over.