3 Bear Post Mortems gathered from IHUB.
Stunned Bear Stearns investors eye legal claims By Martha Graybow
Mon Mar 17, 2:00 PM ET
NEW YORK (Reuters) - Angry Bear Stearns Co Inc (BSC.N) shareholders have wasted no time in calling their lawyers to pursue possible legal claims over the company's $2-a-share fire sale to JPMorgan Chase & Co (JPM.N).
But while the deal may draw legal challenges from investors over its low price, it is unlikely the pact would be killed by the courts, legal experts say.
That's because the venerable investment bank, which agreed to the emergency deal under pressure from the U.S. Federal Reserve as the credit crunch widens, appears to have few other options short of filing for bankruptcy, legal experts say.
Shareholders "could move to enjoin the deal, but that's a tough hurdle," said Michael Kelly, a partner at law firm McCarter & English in Wilmington, Delaware, who specializes in defending corporations in litigation. "I'm sure the board is going to say this is the best option in our judgment."
Bear Stearns is being sold for just $236 million. The deal's value is more than 90 percent below the company's Friday closing share price of $30.85. But JPMorgan said the price tag would total about $6 billion to account for litigation and severance costs.
Shareholders hit by big losses on their Bear holdings are exploring all legal avenues, say class-action lawyers who specialize in bringing lawsuits against large companies. Possible plaintiffs include individual investors, institutions and company employees. The firm's 14,000 staff own about 30 percent of the company.
"I can't divulge privileged conversations, but shareholders don't contact me when they are happy with the way things are going with their investments," said Ira Press, a lawyer at New York-based class-action firm Kirby McInerney, which has spoken with dismayed Bear investors.
"This is a stock that has gone from $50 to $2 literally overnight, and I also know of people who had assumed that the worst had passed when it closed at $30," he said.
Shareholders might sue Bear and its executives and officers for securities fraud, contending they failed to disclose the company's true financial health, lawyers say.
Jeffrey Nobel, a partner at class-action law firm Schatz Nobel Izard in Hartford, Connecticut, said his firm had been contacted by both institutional and individual investors who bought the stock as recently as last week.
Some of these buyers, he said, took their positions after Bear CEO Alan Schwartz said in a televised interview on Wednesday that the company does not see any pressure on its liquidity and had about $17 billion in excess cash on its balance sheet.
"You have investors who are upset because they feel as though the company was not truthful in reporting its financial condition," Nobel said.
Separate suits may be brought by Bear employees who hold company shares that are now virtually worthless, lawyers said.
Another type of lawsuit would challenge the buyout pact itself, but it may be tough for investors to argue that the company ignored other avenues that are better for shareholders and that there is a better way to proceed, Press said.
"There is a possibility that investors will challenge the fairness of the deal, though I would suspect that at this point Bear Stearns must be in dire straits" and that's why it agreed to the buyout, he said.
Another class-action law firm, Bernstein Litowitz Berger & Grossmann in New York, is studying the situation and is in touch with Bear Stearns investors but has not yet made any decisions on filing a lawsuit, said partner Salvatore Graziano.
"It's a fluid situation," he said. "Clearly, we're very focused on it."
(Editing by Dave Zimmerman, Richard Chang)
Ken Sweet
FOXBusiness
One of the more stunning developments of the Bear Stearns (BSC: 4.81, -25.19, -83.96%) fire sale is that many of the firm's 14,000 employees, as well as the firms many thousands of shareholders, have just watched their stakes in the company go up in smoke.
What's more, Sunday's news that JPMorgan Chase (JPM: 40.30, +3.76, +10.29%) would purchase Bear for $236 million, or $2 a share -- a fraction of its value even from the close of trading Friday -- sent fears that there might not be much of Bear Stearns left when the merger is set to be completed later this year.
"This is gonna go down as the biggest theft in all of financial history, said William Smith, portfolio manager of Smith Asset Management and a former Bear employee. "The $2 a share stock price is more symbolic than anything because the alternative is nothing."
"This is one of the unfortunate stories on Wall Street. I'm a former Bear guy. I have friends over there. My friends just watched their fortunes vaporize," Smith added.
The deal between JPMorgan and Bear was whipped together over the weekend to save Bear from both bankruptcy and possible liquidation. If approved by Bear shareholders, it will bring an end to the company's 85-year-old history.
Bear's employees currently own about one-third of the firm's stock. It was considered a point of pride among Bear employees to own stock in the firm, and selling that stock was considered bad form. Indeed, employees often received their annual bonuses in the form of stock. Bonuses received recently are now basically worthless.
Even the company's top management was required to own significant stakes. Former Bear Chief Executive Jimmy Cayne's was worth nearly $1 billion as recent as last year when the firm's stock was at $170. That paper wealth has now evaporated.
Another big loser in this deal might be British billionaire Joseph Lewis, who currently owns a 9.6% stake in Bear. In just a few months Lewis has lost about $1.16 billion in paper wealth.
Click here to read FOX Business Network's senior stocks editor Liz MacDonald's take on the deal
It doesn't have to be just paper wealth that are going up in smoke. According to CNBC's Charlie Gasparino, JPMorgan is expected to lay off more than half of the company's 14,000 employees.
Combined with the stock's collapse, that places at least 7,000 highly-paid employees both poor and unemployed.
The plummeting shares of Bear is already causing shareholders to call their lawyers. The law firm Coughlin Stoia Geller Rudman & Robbins said it has filed a class action suit against Bear Stearns, claiming that company's executives were negligent in their duties to both employees and shareholders, according to Reuters.
According to the terms of Sunday's deal, JPMorgan will exchange 0.05473 of its shares for one share of Bear Stearns. It values Bear at just $236 million, compared to Bear’s Friday market capitalization of $3.54 billion.
The deal is expected to close in the next 90 days, and is subject only to shareholder approval, which both banks expect to happen.
"JPMorgan Chase stands behind Bear Stearns," said JPMorgan Chief Executive Jamie Dimon in a press release Sunday. "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk."
Shareholder approval could become a point of contention. In a conference call Sunday night, an individual shareholder asked JPMorgan why this deal was better than bankruptcy. When JPMorgan officials refused to answer and directed the question to Bear, the shareholder defiantly told JPMorgan he would vote down the merger.
Bear's shares traded at more than $150 less than a year ago. The deal places Bear's stock at a 93% discount to Friday's close.
While an individual shareholder's voice might not be significant, it potentially echoes the sentiment of other shareholders. Bear has always been known as a defiantly independent organization. With Bear employees owning one-third of Bear, and individual and institutional investors feeling that $2 a share might be too little, there could be a proxy fight.
To finance the deal, the Federal Reserve approved up to $30 billion in special financing to help JPMorgan work through Bears illiquid assets, mostly complicated investments backed by subprime mortgages.
Click here to read Fed Cuts Lending Rate to Help Thaw Credit Freeze
Bear's massive holdings in securities backed by subprime mortgages and other risky investments enabled JPMorgan to purchase the company at such a discount. These securities have been basically frozen since August, and Bear and others banks like Citigroup (C: 18.62, -1.16, -5.86%) and Merrill Lynch (MER: 41.18, -2.33, -5.35%) have had to sit back and watch as the value of these assets has collapsed.
JPMorgan's CFO said in a call to investors Sunday night that once the company acquires Bear it will conduct an "orderly" selling of approximately $5-6 billion of Bear's assets in order to get them off the balance sheet. The bank said that, even with the merger, JPMorgan plans to maintain its tier one capital ratio of 8%.
The $236 million price tag values Bear at less than the cost of its headquarters on Madison Avenue in Midtown Manhattan, which is worth about $1 billion, according to current real estate market estimates.
The discount is also largely due to the huge transaction costs JPMorgan said it will have to incur in order to acquire Bear. JPMorgan said those costs approach $6 billion, much of it related to litigation, as well as the cost of reducing the balance sheet, various accounting measures and costs related to physically merging the two companies.
Despite the huge discount, JPMorgan will in fact be acquiring several strong businesses, most notably Bear's prime brokerage and global clearing businesses. JPMorgan said it expects Bear will provide, once fully integrated, $1 billion in earnings for the firm.
This deal closed at near record speed. JPMorgan officials said they had a team of more than 200 people working on the deal over the weekend, collecting as much information on Bear as they could.
It was widely expected Bear would not survive the weekend based on the torment the company went through beginning last summer. The final decline began early last week when speculation hit the markets that Bear was having a tough time building its liquidity position.
According to the firm, those rumors escalated on Thursday, which caused some of the company's clients to pull their money out of the firm. In other words, Bear suffered from a classic example of a run on the bank.
"People wanted to get cash out," Bear Stearns CEO Alan Schwartz said Friday on a conference call. "At the pace we were going, the continued liquidity demands would outstrip our liquidity resources."
The deal between Bear and the Federal Reserve and JPMorgan was to keep Bear functioning "normally" for 28 days.
As part of the acquisition, JPMorgan said it would guarantee all past and future business by Bear until the transaction is approved. The banks said they have already spoken with regulators and believe they have more than enough support.
The guarantee is incredibly important for Bear, because the bank is going through an almost lightning-quick collapse of confidence in the company's ability to operate. Traders and other investment bankers said on Friday they refused to do business if Bear was the counterparty. With the backing of the larger and cleaner balance sheet of JPMorgan, Bear can return to business until the acquisition is completed.
Let's Get Real About Bear-Outside the Box
I already have a slew of emails from people upset about what they see as a bailout of a big bank, decrying the lack of "moral hazard." And I can understand the sentiment, as it appears that tax-payer money may have been used to bail out a big Wall Street bank that acted recklessly in the subprime mortgage markets.
But that is not what has happened. This is not a bailout. The shareholders at Bear have been essentially wiped out. Note that a third of the shares of Bear were owned by Bear employees. Many of them have seen a lifetime of work and savings wiped out, and their jobs may be at risk, even if they had no connection with the actual events which caused the crisis at Bear. Don't tell them there was no moral hazard.
For all intents and purposes, Bear would have been bankrupt this morning. The $2 a share offer is simply to keep Bear from having to declare bankruptcy which would mean a long, drawn out process and would have precipitated a crisis of unimaginable proportions. Cue the lawyers.
As I understand this morning, JP Morgan will take a $6 billion write down, which is essentially what they are paying for Bear. The Fed is taking $30 billion dollars in a variety of assets. They may ultimately take a loss of a few billion dollars over time, although they may actually make a profit. When you look at the assets, much of it is in paper that will likely get close to par over time, and the good paper will pay premiums mitigating the potential loss. The problem is, as the essays below point out, no one is prepared to take that risk today.
If it was 2005, Bear would have been allowed to collapse, as the system back then could deal with it, as it did with REFCO. But it is not 2005. We are in a credit crisis, a perfect storm, which is of unprecedented proportions. If Bear had not been put into sounds hands and provided solvency and liquidity, the credit markets would simply have frozen this morning. As in ground to a halt. Hit the wall. The end of the world, impossible to fathom how to get out of it type of event.
The stock market would have crashed by 20% or more, maybe a lot more. It would have made Black Monday in 1987 look like a picnic. We would have seen tens of trillions of dollars wiped out in equity holdings all over the world.
As I have been writing, the Fed gets it. Their action today is actually re-assuring. I have been writing for a long time that they would do whatever it takes to keep the system intact. As one of the notes below points out, this was the NY Fed stepping in, not the FOMC. The NY Fed is responsible for market integrity, not monetary policy, and they did their job. And you can count on other actions. They are going to change the rules on how assets can be kept on the books of banks. Mortgage bail-outs? Possibly. The list will grow.
Yes, tax-payers may eventually have to cover a few billion here or there on the Bear action. But the time to worry about moral hazard was two years ago when the various authorities allowed institutions to make subprime loans to people with no jobs and no income and no means to repay and then sold them to institutions all over the world as AAA assets. And we can worry in the near future when we will need to do a complete re-write of the rules to prevent this from happening again.
But for now, we need to bail the water out the boat and see if we can plug the leaks. Allowing the boat to sink is not an option. And get this. You are in the boat, whether you realize it or not. You and your friends and neighbors and families. Whether you are in Europe or in Asia, you would have been hurt by a failure to act by the Fed. Everything is connected in a globalized world. Without the actions taken by the Fed, the soft depression that many have thought would be the eventual outcome of the huge build-up of debt would in fact become a reality. And more quickly than you could imagine.
As I have repeatedly said, recessions are part of the business cycle. There is nothing we can do to prevent them. But depressions are caused by massive policy mistakes on the part of central banks and governments. And it would have been a massive failure indeed to let Bear collapse. I should note that this was not just a Fed action. Both President Bush and Secretary Paulson signed off on this.
The Fed risking a few billion here and there to keep the boat afloat is the best trade possible today. Their action saved trillions in losses for investors all over the world. It is a relatively small price. If you want to be outraged, think about the multiple billions in subsidies for ethanol and the hundreds of billions of so-called earmarks over the past few years to build bridges to nowhere. And think of the billions in lost tax revenue that would result from the ensuing crisis. I repeat, this was a good trade from almost any perspective, unless you are from the hair-shirt, cut-your-nose-off-to-spite-your-face camp of economics.
The Fed is to be applauded for taking the actions they did. And they may have to do it again, as there are rumors that another major investment bank is on the ropes. I hope that is not the case, and will not add to the rumors in print, but I am glad the Fed is there if we need them.
It is precisely because the Fed is willing to take such actions that I am modestly optimistic that we will "only" go through a rather longish recession and slow recovery and not the soft depression that would happen otherwise.
I got a very sad letter today from a lady whose husband is in the construction business an hour from Atlanta. He has had no work for four months and they are rapidly going through their savings. The jobs he can get require them to spend more in gas to drive to than he would make. He is sadly part of the construction industry which everyone knows is taking a major hit.
But without the Fed action, that story would have multiplied many times over, as the contagion of the debt crisis would have spread to sectors of the economy that so far have seen only a relatively small impact. Unemployment would have sky-rocketed over the next year and many more families would have been devastated like the family above. It would have touched every corner of the US and the globe.
Bailing out the big guys? No, the Fed does not care about the big guys, and only mildly pays attention to the stock market, despite what conspiracy theorists think. In the last few years, I have had the privilege of meeting at length with a number of Fed economists and those who have their ear. They are far more focused on the economy, their mandates for stable inflation and keeping unemployment as possible.
No one who owned Bear stock was protected. This was to protect the small guys who don't even realize they were at risk. To decry this deal means you just don't get how dire a mess we were almost in. It is all well and good to be rich or a theoretical purist and talk about how the Fed should let the system collapse so that we can have a "cathartic" pricing event. Or that the Fed should just leave well enough alone. But the pain to the little guy in the streets who did nothing wrong would simply be too much. The Fed and other regulatory authorities leaving well enough alone is part of the reason we are where we are. First, get the water out of the boat and fix the leaks, and then make sure we never get here again.
And yes, I know there are lots of implications for the dollar, commodities, markets, interest rates, etc. But we will get into that in later letters.
For now, let's go to the essays from my friends and then a quick note about the stock market.
John Mauldin, Editor
Outside the Box
Public Reply | Private Reply | Keep | Last Read Replies (1) | Next 10 | Previous |
