It doesn’t take much but a quick look at the recent S-4 filing to realize that the JPMorgan-Bear deal was a lot less certain than most accounts have highlighted.
We can begin the story with familiar territory:
On the morning of Wednesday, March 12, 2008, Mr. Schwartz participated in the CNBC interview and addressed Bear Stearns’ liquidity position as relatively unchanged since the beginning of the year as contrasted with the unwarranted market rumors and speculation. During the course of that day, however, an increased volume of customers expressed a desire to withdraw funds from, and certain counterparties expressed increased concern regarding maintaining their ordinary course exposure to, Bear Stearns, causing senior management of Bear Stearns to become concerned that if these circumstances accelerated Bear Stearns’ liquidity could be negatively affected.
At least according to this filing, Schwartz wasn’t lying about liquidity. This isn’t really surprising unless one has a burning need tending towards conspiracy theories. The nature of a liquidity crisis in a firm as leveraged as Bear (or any of the large banks) is quick and brutal.
During the evening of March 13, 2008, Bear Stearns senior management met with its legal and financial advisors to review the events of the day, the sharp deterioration in its liquidity position, and options potentially available to Bear Stearns. Following this meeting, Mr. Schwartz contacted James Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, to discuss Bear Stearns’ liquidity position and seek funding assistance or a business combination.
Yes, we knew this. Of course, Bear’s directors, and indeed Bear management, had a duty to try and maximize value, even if the face of the crisis. Accordingly:
Also during the evening of March 13, 2008, at Bear Stearns’ direction, Lazard began contacting other parties to determine their potential interest in providing financing to Bear Stearns or, alternatively, in taking other action intended to stabilize the company, such as purchasing a business unit of Bear Stearns or acquiring Bear Stearns. Later that night, Lazard reported to the senior management of Bear Stearns that there was no significant interest from the parties it had contacted, with the exception of one potential bidder, Bidder A, a private equity firm that had indicated an interest in exploring a potential transaction with Bear Stearns.
Uh oh.
Throughout the day of Friday, March 14, 2008, Lazard also spoke with other parties regarding their potential interest in a strategic transaction with Bear Stearns. Lazard met with senior management of Bear Stearns to discuss the results of its contacts with other parties and reported that, aside from Bidder A and JPMorgan Chase, none of the parties expressed meaningful interest, although two other parties had indicated an interest in conducting due diligence. Bear Stearns prepared an electronic dataroom to permit potential bidders to conduct due diligence. Later in the afternoon and evening of March 14, 2008, Bidder A conducted due diligence at Bear Stearns’ headquarters.
So now we are on Friday afternoon, and other than JPMogran, which, owning to existing commercial ties to Bear, must already have had a strong sense of Bear’s assets, only “Bidder A,” a private equity firm who had only been involved for days, attacks a virtual dataroom and Bear’s headquarters to try to get up to speed on what is worth buying and what price it is worth buying at. Yet, in the face of this effort:
On Friday evening, Bear Stearns and JPMorgan Chase were informed by the New York Fed that the New York Fed-backed secured lending facility that had been entered into earlier that day would not be available on Monday morning. Also on Friday night, a government official advised Mr. Schwartz that a stabilizing transaction needed to be accomplished by the end of the weekend.
The “government official” is, of course, not identified. But we have our guesses.
Bear Stearns’ senior management concluded that it would not be possible to open for business on Monday, March 17, 2008, without obtaining substantial alternative sources of funding and that Bear Stearns’ only options were to consummate a transaction over the weekend or file for bankruptcy by Monday morning. During the course of the day, the two other parties indicated that they were not interested in pursuing a transaction with Bear Stearns and consequently did not perform due diligence.
And then there were two.
It also seems clear that, contrary to some more sinister suggestions, bankruptcy was a real fear to the bitter end:
During the course of the day on Saturday, March 15, 2008, a separate team of Bear Stearns representatives and Bear Stearns bankruptcy advisors met to analyze potential bankruptcy and/or liquidation scenarios, taking into account, among other things, the significant limitations on bankruptcy relief and automatic stay protections available to stockbroker businesses under the United States Bankruptcy Code, as well as the liquidation provisions of the Securities Investor Protection Act of 1970 applicable to insolvent or bankrupt broker-dealers, and the risks associated with such scenarios. Bear Stearns’ bankruptcy advisors continued to prepare for the possibility that a bankruptcy filing might be necessary late Sunday if a transaction could not be agreed upon.
“Bidder A” makes a run at the transaction:
In the afternoon of March 15, 2008, Bidder A presented a preliminary proposal to Lazard for a transaction with Bear Stearns. Bidder A’s proposal involved a cash infusion of $3 billion into Bear Stearns in return for a 90% equity interest in Bear Stearns, with the existing Bear Stearns stockholders diluted to 10% ownership on a pro forma basis. The proposal also required a $20 billion credit facility from a consortium of banks that had not yet been formed and assurance that the New York Fed would make loans available to Bear Stearns through its discount window for a period of one year.
One can already see that the disadvantage that Bidder A faces, behind the due diligence curve, hurried, without financing, and facing assets that would not hold still (downgrades had hit Bear earlier in the week). JP Morgan was quicker. By Saturday evening they told Lazard they were considering an arrangement where “Bear Stearns common stock would be exchanged for JPMorgan Chase common stock having an implied value range of $8 to $12 per share of Bear Stearns common stock.”
And this is a point that seems lost on many commentators. The original offer looked to be a lot higher than $2, but there were significant caveats because JP Morgan had not finished conducting due diligence. Later Saturday night, Bear, in turn, pointed out that they would not be able to provide the customary assurances of accuracy for the diligence information they had provided (one assumes because of the speed with which the material had been compiled and the lack of an opportunity to review it). So now JP Morgan has two diligence problems. First, their own difficulty in absorbing the material. Second, that they have been told by the seller that even the, usually vague, customary representations about accuracy would be unavailable.
Bidder A was still at it Sunday night and “two large financial institutions with which Bidder A had been speaking arrived at Bear Stearns’ headquarters to conduct due diligence.” But, alas, it was not to be and Bidder A fell off, unable to secure the support of lenders or the New York Fed for their offer.
Somewhere in here the offer from JP Morgan fell to $4 per share. Keep in mind that JP Morgan had told Bear that their offer might sink below $8 per share based on what due diligence uncovered- and even this was before Bear had announced that they really couldn’t say if anything that had provided in the way of diligence wasn’t just totally made up. Still, the $4 offer seemed firm enough that Lazard, apparently, took it to Bear. Shortly thereafter, JP Morgan lowered it to $2 per share. And here is one of the more interesting lines in the filing:
JPMorgan Chase informed representatives of Bear Stearns that, following JPMorgan Chase’s discussions with government officials, it was unwilling to increase the $2 per share merger consideration.
Wonderfully vague.
So now Bear’s board is faced with two options. Bankruptcy or JPMorgan’s offer. Not only that but:
…the board of directors was advised by Lazard, Bear Stearns’ legal advisors and management that it was their collective view that, in the event of a bankruptcy of Bear Stearns, the holders of Bear Stearns common stock likely would receive no value and there likely would be losses incurred by certain creditors of Bear Stearns.
Legally, it’s difficult to see how any of Bear’s directors, in the face of the legal and financial advice offered by their professional ass-protectors could have met their duty to shareholders by making any other decision than to approve the JP Morgan offer.
The press release came out Sunday evening.
And, for most people, that’s the story, except for the sudden, unexpected rise of the stock to $10. But was it unexpected? Of course, someone(s) had been bidding it up right after the announcement. It wasn’t JP Morgan, or not much of it anyhow. By the time JP Morgan started buying they were paying $8 or even $11-$12 per share. (Their 13D filings are interesting in this respect). What happened between the $2 and the $10?
…following the announcement of the transaction on March 16, 2008, Bear Stearns’ customers continued to withdraw funds, counterparties remained unwilling to make secured funding available to Bear Stearns on customary terms, and funding (other than from JPMorgan Chase and the New York Fed) was not available.
At the same time, and this is where I start to re-read paragraphs two and three times because I am convinced I got something wrong, Bear started to get… well… testy. This is now Friday March 21, 2008:
Bear Stearns indicated that it would consider the revised proposal but that it would not agree to issue and sell to JPMorgan Chase shares of Bear Stearns common stock that, after the sale, would result in JPMorgan Chase owning approximately two-thirds of Bear Stearns’ common stock on a pro forma basis and that any revisions requested by JPMorgan Chase to enhance certainty of completion would have to include an increase in the merger consideration to be paid to Bear Stearns’ stockholders.
Bear is still bleeding cash. JP Morgan, naturally, as they are one of Bear’s primary creditors by this point, starts to insist on measures that will assure they will actually control Bear after things settle down, like, say, an agreement by Bear to sell JP Morgan 66% of Bear’s shares. Bear refuses.
Bear refuses.
This absolutely floors me.
Then you read on. As it turns out, by that evening Bear had borrowed some $32.5 billion dollars and was, again, out of cash. JP Morgan by this time had loaned Bear $3.6 billion in unsecured funds. That’s over and above anything the Fed would back, and it’s only the first Friday after Schwartz called Jamie Dimon in the first place.
What in the world was Bear thinking by not giving assurances at this point? There were no other sources of liquidity to be had and they are poking JP Morgan with a sharp stick. Again the “crack bankruptcy team” went to work.
You know, now that I think of it, I would love to make a one hour network TV drama called “Crack Bankruptcy Team.” The timing is perfect what with the massive spate of them that will probably come through the gate this year. Like Law & Order we don’t even need much in the way of writers. Take some Bankruptcy court transcripts and spice them up a bit and you’re good to go. Add a cool theme song like on “The Practice” and a cold opening with a boardroom filled with a bunch of corpulent white guys around a big table talking about cash flow and desperation… and a token female executive- or, wait, maybe I could get Tilda Swinton to play the part. You know, a women in the lead would really make the show, now that I think about it. And, we could do spin-offs. You know, CBT: Detroit (lots of work there, we can do the union angle too) or CBT: Special Municipal Unit. But, you know, maybe I need a new acronym. No, no, I’ll get Glenn Close to take the lead and we can leave the acronym as it is. Note to Dick Wolf: Call me. But, I digress.
Bear Stearns would not be able to open for business on Monday, March 24, 2008 and would have no choice but to file for bankruptcy by that morning. Bear Stearns’ bankruptcy advisors were instructed to be prepared for this contingency by the end of the weekend.
So while everyone is bitching about price and how greedy JP Morgan and Jamie Dimon must be, Bear is about to blow the entire thing. Can you even imagine the shareholder lawsuits?
Still, seems to have worked out. And everyone is happy. Well, ok, so no one is really happy. And lots of secrets remain.
Who is the secret “government official” who held Schwartz to the first Monday deadline?
Which “government officials” talked to JP Morgan before $4 became $2?
Who did those government officials talk to at JP Morgan exactly?
What was Bear’s board smoking?
Will Glenn Close take the part?
Form S-4 [EDGAR]
As I have been saying on this board all along, in response to all these “conspiracy theorists” most of whom are DB posters and decrying the greed and arrogance of Mr. Dimon, Bear was LUCKY to get the $2 of the initial offer, and it is testament to the ongoing mismanagement of this franchise that they continued to bitch and moan and nearly blew even that deal. Sure they eventually got a higher price from being stupid, they also had years of profitability from being an over-levered subprime chop shop.
ep – congrats. never before has a db post ever been a perfect 1-pooper.
who cares? bsc is jpm’s vietnam….maybe get the theme song from ‘apocalypse now’ and dimon saying ‘i love the smell of bankruptcy in the morning’.
Couple notes:
In the zone of insolvency, directors owe fiduciary duties not just to shareholders but also to creditors. That always affects the bankruptcy analysis. The directors would were looking at a liquidation that would return zero to shareholders, drastically impair the interests of creditors (unsecured and secured), cripple the firm by replacing management with a trustee (required in Ch. 7 proceedings) and dramatically accelerate the departure of clients, employees and counter-parties.
In that circumstance, $2 per share was a gift and access to JPM liquidity a godsend.
You’re “floored” that Bear would give up one of its last bargaining chips for nothing?
Come on. What did Bear have to lose at that point? And what did JPM have to lose?
are we back on this topic again? c’mon, don’t make me go back to some of the previous discussions and start quoting myself. equity private, it’s time to move on, but if we must revisit:
the fed sponsored foreclosure (it wasn’t a bailout, remember) was the best thing to happen to big daddy cayne and the boys/girls. when a financial buyer is your best alternative in the FIG world, you have issues…remember, leverage is what got them into this problem in the first place. I agree with @9:43, the conspiracy theorists are as funny as the post yesterday about getting taken care of by the wife at home (mr. spitzer, care to comment?)!
“You’re “floored” that Bear would give up one of its last bargaining chips for nothing?”
Not really, now that I think about it. Same as they almost scuttled the LTCM plan.
Very scorched earth kind of negotiators, those Bears.
“the theme song from ‘apocalypse now’” ?
Don’t think there is one. If you are talking about the famous Doors song “The End,” please crawl back into your cradle.
The official was Paulson, no doubt making a couple lip service calls to a VERY disinterested White House. It was the Paulson show.
As for post-Monday, no rational person at BSC could have possibly believe it would ever stand alone again, but there wasn’t much, on the margin, to lose by playing chicken with JPM and the federal gov’t. And it worked, Schwartz is probably one of the 5 best dealmakers on Wall Street (not necessarily the best CEO)and from the congressional testimonies it seems like he played the best hand he could with the hand he was dealt at every turn.
That’s not scorched earth — that’s restructuring 101.
It’s a fun business.
I think he means The Ride of the Valkyries.
Given that JPM had just lent BSC over $3bn in unsecured funds, and likely had massive exposure to them in all sorts of other areas of business as well, BSC saying “No” to JPM makes sense.
If I owe the bank $1mm they own me. If I owe them $10b then I own them. If BSC had gone down it would have cost JPM a lot more than the few hundred million they had to pony up for the $10 bid vs a $2 bid.
Perhaps BSC management wasn’t as stupid/high as we’ve all believed.
Oh god, even worse. Doesn’t know Ride of the Valkyries?
Probably the same halfwit from Opening Bell who thinks he is too smart to realize the connection between “delta” and “change”
“383 Mad Tenant, like, yeah”:
@10:12AM
You mean, like the Doors performed in Vietnam when the Ameriprise dude was making that acid movie? Wow…
It’s cold in this here comm closet – wonder what this plug goes to…whoops!
@10:33 asinine, just plain asinine. are you kidding? while they managed to get more than they deserved; the only thing the bad news bears owned was a place in the annals of the history bad judgment, right next the boys at ltcm. while jpm is a large (largest?) player in the derivatives market, bear didn’t own them. don’t be delusional, get off the crack! http://www.youtube.com/watch?v=yhdNjSbSLDM (turn down the volume or close the door)
Investorcluzo – you’re clearly an idiot.
BSC had a fantastic negotiating position once JPM had lent them billions of unsecured dollars. If they hadn’t used that position they’d have been in breach of their fiduciary responsibilities.
Obviously the management in general wasn’t that smart, otherwise BSC wouldn’t now be an object lesson in how not to run an investment bank, but that doesn’t mean they didn’t make a smart decision to play hardball in the end to get $10 instead of $2.
love ya EP.
Crack bankruptcy team? More like bankruptcy team on crack, amirite?
Ride of the Valkyries? That’s the music from Star Wars or Star Trek or something, right? God, you people are, like, sooo old.
- Muffie
@ 10:48 Jim Cracchiolo made an acid movie about ‘Nam?
@10:57 – perhaps you could use some facts. how could their position have been so “fantastic” if they sold the company for 12% of the reported book value at 2/28 – post mark down? $10 is hardly a victory. maybe they could play hardball with the chinese and get the $1 billion dollars they promised in october of last year. back to kinder care for you…maybe they will teach you what a 10Q is.
muffie– do you have a bearded clam?
firings today?
hah. kinder care. good one.
Muffie, you didn’t log in. And you aren’t on AIM?
can someone please get us an update on the “reduction in workforce”? like: at what level (assoc., analyst, md etc.) , what groups, severance packages (if any). Also are people being escorted out of the building by jpm security or just voluntarily jumping out the windows at 383 mad?
Investorcluzo, I don’t know if you’re being deliberately ignorant or just playing a retarded person for laughs. Either way, Bravo!
BSC’s position ONCE JPM HAD LENT THEM $3BN UNSECURED was a very strong one. Hence they managed to get the bid price quintupled.
What’s hard to understand about that? I’m not saying they held a position of strength from the start of the negotiations, and obviously 12% of book is a tremendous failure from the start of the week, but if you learned to read you’d see that I was talking about their position once they’d had the $2 bid and the money lent to them.
I was prepared to be scornful of Alan Schwartz at the Congressional hearing, but I too was surprised at how good he was given the hand he was holding.
Jimmy Cayne only let Schwartz assume the job of CEO Jan. 1, 2008. The liquidity crisis began March 12, 2008. Schwartz didn’t have much time or opportunity to demonstrate his ability as CEO. He looks bad as the CEO who lead his team into a buy-out where his employees lost their shirt until you know the full story.
Bears’ legal and regulatory problems are mind-blowing. Before this latest stuff surfaced, they already had more than a full plate of legal problems. This is one aspect of assuming the Bear business that would be daunting and probably prove more expensive than anticipated. However, it’s always easier to clean up someone else’s messes (and have carte blanche to fire people) than have to fight office politics to clean up your own.
Equity Private – good post! I agree with @11:41am, what’s the situation this week on the Bear layoffs? Btw, @11:41am, you’re funny.
@ 12:08 11:41 here. thanks. been reading comments on this site for a while. but relatively new when it comes to posting my own. will make best efforts to keep up to the intellectual standards of my fellow posters.
What was it, about $6bn JPM alloted for “transaction expenses” and the like (e.g. litigation)? Figure if JPM had more time to do proper diligence and fully evaluate the various risk exposures (financial, legal, sexual, etc), they would have uncovered a number not-too-far off from that allocation. This is, of course, lost on whiney BSC shareholders who think their company is worth more (“but the buidling is worth $1bn” BTW, any discussion in the filings about the structure/composition of the lease on 383 Madison?).
Can we get binary options on when this debacle will close, I mean fully? I’m buying Q3 ’11.
who cares? any of you bsc whiners know how to mow lawns or wash windows?
2:21 no, but we like fucking your wife
2:21 no, but we like fucking your wife
Thats probably a BSC joke right? Ever think someone’s wife or loved one was killed in a car accident last year? Fucking loser BSC guy. I truly hope you wind up washing cars in Harlem.
2:49
Relax its a blog, not a think tank or your Temple forum
Washing cars, yeah try sailing yachts
@2:49pm. No, that’s a pretty standard comeback to a hostile blog entry like “bsc whiners … mow[ing] lawns or wash[ing] windows.” Hey, those people are losing their jobs today, nice guy. And I don’t believe your wife died in a car accident last year, either.
@3.24–Maybe yo should believe it.
@3.09–The only yachts the bsc clowns will see is when they’re scraping barnacles off the bottom
Only the classiest of people here @ DB, sigh…
Anal_yst, I’m taking Q3 ’08. This has to close out of necessity, and won’t get held out by employees and stockholders bitching. They’ve all given up already and are whining because it makes them feel better. If you mean until every loose end is tied up, where can I buy a 2020 leap? Plus, 383 Mad is useless to stockholders since its fire sale would be used to ad a couple pennies on the dollar onto the debt settlement. Prime brokerage, if anyone’s thinking of that, would be completely worthless with only Bear securing transactions (this had to have been one of JP Morgan’s prime negotiating points – Prime Brokers is worth a fortune to them but worth nothing without them).
Also, 10:33/10:57/11:52, are you out of your fucking mind(s)?! If Bear boardmembers had played hardball, effectively knowingly sabotaging the only out their worthless firm had, they would have left themselves open to ruinous lawsuits by debtors, bondholders, and counterparties. By agreeing to the merger, Bear upheld its fiduciary duty to them by keeping their commitments secure and intact. Plus, I’m sure some creative lawyer would have figured out a way to the quantify the damage caused by a Bear banruptcy exploding the systemic risk in global finance and gone after them for that as well.
Check out this FUNNY CARTOON on you tube where the The Federal Reserve and JP Gobble Bear Stearns
http://www.youtube.com/watch?v=-9_EMDfnTfw
EP, if this teevee project of yours makes any headway, puhleeeez hire me as a writer for Crack Bankruptcy Team.
Opportunities for so much fun, so little work, are rare indeed.