Angry Bear Stearns shareholders and class-action lawyers eager to represent them in the inevitable lawsuits of Bear’s sale to JP Morgan Chase are already sounding off against the deal. As soon as the deal was announced, a Bear Stearns investor asked JP Morgan executives “Why is this better for shareholders of Bear Stearns than a Chapter 11 filing?”
In the eyes of many on Wall Street, the answer is obvious. In the first place, they see Bear’s investors as risk-takers who deserve to bear the brunt of the collapse of the company. The enormous trading volume on Friday suggests that many of the investors of those currently holding shares of Bear Stearns bought the stock after news of trouble spread last week.
What’s more, the deal is seen as an important effort to stop a ripple effect from bringing down other financial institutions. It extends the guarantee of JP Morgan over Bear Stearns’s trading positions, giving Bear clients and counterparties the reassurance of a backstop in JP Morgan’s balance sheet. The Fed was desperate to avoid a bankruptcy, according to many reports, and actively encouraged Bear Stearns to accept this deal. In a statement, Bear Stearns Chief Executive Alan Schwartz said the deal “represents the best outcome for all of our constituencies based upon the current circumstances.”
That’s a strange way of looking at a deal for a Delaware company, Gordon Smith points out. After the jump, find out why.
“Best outcome for all of our constituencies”? Bear Stearns is a Delaware corporation, and when the directors of a Delaware corporation are deciding whether to sell the company, generally speaking they are charged with a very narrow decision rule: get the “best value reasonably available to the stockholders.”
But Delaware law also provides exceptions that allow companies to consider creditors when the company is in the vicinity of bankruptcy, Smith writes. Delaware courts have rejected pleas by investors who argued that a company should have sought bankruptcy protection rather than a fire-sale. “Equity holders will be upset, but Delaware corporate law will not come to the rescue,” he concludes.
Larry Ribstein seems to agree, arguing that the business judgment of the Bear board of directors will override investors who second-guess the deal. But it’s a close call. “Certainly this fact scenario will test the limits of this approach,” he writes.
Would a Delaware court consider the prodding of the Federal Reserve and Treasury Department officials to count in favor of the board’s decision to sell? There are good public policy reasons for a court to consider this, and the Delaware courts have often shown itself to not be adverse to allowing policy considerations to affect their decisions.
While this reasoning is helpful to Bear’s board and JP Morgan, these types of arguments could have a negative impact on share prices of troubled financial institutions. The possibility of being made the bear the risk of “ripple effects” should now be considered a risk-factor by investors. In fact, we wouldn’t be surprised if this appears as a risk factor in the next round of financial statements. If the Fed won’t allow shareholders to take residual value through a bankruptcy proceeding and will force them to accept fire-sales of the firm, this is a serious risk for capital or liquidity challenged firms.
Bear Stearns’ Decision to Sell [The Conglomerate]
http://busmovie.typepad.com/ideoblog/“>The fiduciary duties of Bear Stearns directors [Ideoblog]
Cramer is so full sh*t on CNBC right now (just a sec ago actually). ARRRGGGGGHHHHH! I pray for anyone that every took any of his investment advice.
so can anyone tell me the difference between buying bear sterns common and bear sterns? perhaps he was talking about preferred equity ;)
should have bought the debt people…anyone know what the credit spreads are doing today? and riddle me this batman, what happens if the markets miraculously turn around and all that collateral bear has on the books is actually worth 85 cents on the dollar (due to the “non-bailout”, b/c this isn’t a “bailout”). would the shareholders revolt before a vote? not saying that it will, just playing devil’s advocate. but with the stock trading at 100%+ premium to jamie’s offer, there has to be more than just short covering going on. just askin’…
This is scary:
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_T/threadview?m=tm&bn=2670&tid=108980&mid=108980&tof=2&frt=1
I’ve never been a Cramer hater until now. His coverup of the Bear Stearns call he made is beyond belief.
I’d agree with the learned perfessers. The BSC Board had to have concluded that the company was insolvent on Thursday night (as in “unable to pay its debts when due and payable”) so in that circumstance (a/k/a “trading in the zone of insolvency”), the Board has a fiduciary duty to ITS CREDITORS. The shareholders are below water and viewed as already holding nearly worthless claims against the company. Ergo, fuck ‘em.
But, and please correct me if my read is wrong here, didn’t JPM explicitely say they were not assuming the obligations of BSC, i.e. (senior) unsecured debt?
See what Joe Lewis had to say on BB. He called JPMorgan’s offer “derisory” and said he didn’t think JPMorgan would get it.
Has anyone seen the memo from Bear that came out last night?
It was what was best for the company.
Um- yeah right!
It was what was best for the top dogs! Do you really think Shwartz gives a crap about the 14000 people that just got f’d?? Better yet do you think he gives a crap about the 14000 people that have dedicated so much to the firm for so many years?
I bet he doesn’t as he goes home to his million dollar home as the lowly margin clerk takes the 5/6 train from their step child office in Metrotech brooklyn to their wife and 3 kids…wondering how he will make his rent check next month and how he was soooo close to retiring, and now he has to work until he is 79 before he can retire!
Cayne/Shwartz… Thanks for the memories…
If the employees were smart, they would start looking for employment elsewhere NOW! Don’t give JP the satisfaction of dumping you…
4:59 – nice rant, but it would be better if you actually knew that the 6 train doesn’t go to Metrotech. In fact, it doesn’t even go to Brooklyn.
Hey all you Bear Stearns former employees. Welcome to the real world. Think there is a recession now kids? And hows’ that employee stock ownership plan working out for you.
well, the writer did actually say 5/6… but point taken.
@5:04 Nice rant? Just wondering, were you on the side of the associates when the crying was about crappy bonuses (“My area made big money for the firm this year, its not fair that my bonus has to be sacrificed because others were stupid…”)? Or are margin clerks not worthy of any sympathy?
according to the jp transcript holding company debt will assumed by jp after deal closes, so the debt will be jp hold co debt both sr and jr.
mark your calendar as today being the official day when investment partnerships (“hedge funds”) took over wall street.
this entire scheme was devised to protect their money.
Bloomberg took down the comment by Joe Lewis that the JP Morgan offer was “derisory” and that they wouldn’t get it. Now it’s posted on Bloomberg that Joe Lewis has no comment, but Bloomberg does have a rare picture of the man.
What kind of a person gets off on another person’s pain? Sadists, I suppose. Why is the financial pain being felt by Bear Stearns’ support staff such a funny joke? The firm was in existence for 80+ years. There were a lot of reasons for ordinary people working there to rely on it for the future. None of the support staff were reasonable for prognosticating whether the country was in a recession or not. I bet all of them were living in the “real world,” paying rent and mortgages and planning for the day they didn’t have to work.
I don’t think you can turn Bear’s insolvency into a morality play on what happens when half your retirement assets are in one position. Everyone old enough to have seen the various blow ups in the last 20 years knows better, and those working in finance (margin clerk or otherwise…maybe margin clerks especially) know what happens when concentrated positions take a shit.
there are going to be a lot of piks toggled this year.
a lot.
What I want to know is, where does fiduciary duty to the American Contract Bridge League fall in the priority list?