vgbhfg
KEL380
DAVID STOWELL
Investment Banking in 2008 (B):
A Brave New World
The Aftermath of Bear Stearns
Furious Bear Stearns shareholders found a loophole in the hastily arranged merger documents. In the rush to consummate the deal, JP Morgan had accidentally agreed to honor
Bear’s trades for up to a year irrespective of shareholder approval of the merger. This oversight created the terrifying specter of Morgan failing to acquire Bear but nonetheless remaining on the hook for billions in potential losses from Bear trades gone awry. Holding negotiating leverage for the first time since the crisis began, newly minted Bear CEO Alan Schwartz pushed JP Morgan
CEO James Dimon to up the final offer price from $2. In the ensuing week-long fracas, Bear once again appeared headed for bankruptcy, this time via a Chapter 7 liquidation that would have put downward pressure on securities prices around the world. With the Fed’s reluctant approval,
Morgan finally increased its bid to $10 per share for a total transaction value of $1.2 billion. The
Fed lent JP Morgan $30 billion, taking Bear’s mortgage holdings as collateral. Morgan assumed responsibility for the first $1 billion of any potential losses, leaving U.S. taxpayers with $29 billion in exposure to Bear portfolios. The transaction was so difficult to value that Gary Parr’s
Lazard approved fairness opinions on both the $2- and $10-per-share offers within the span of one week.
As Dimon began the herculean undertaking of integrating two financial colossi with sprawling, overlapping operations and profoundly different cultures, market observers attempted to make sense of the shocking speed with which Bear went from a viable investment bank to a party with whom no one in the market wanted to trade. Some observers pointed to its extreme leverage and its excessive exposure to risky subprime securities, but many Bear executives, largely off the record, claimed that Bear had fallen victim to a
DAVID STOWELL
Investment Banking in 2008 (B):
A Brave New World
The Aftermath of Bear Stearns
Furious Bear Stearns shareholders found a loophole in the hastily arranged merger documents. In the rush to consummate the deal, JP Morgan had accidentally agreed to honor
Bear’s trades for up to a year irrespective of shareholder approval of the merger. This oversight created the terrifying specter of Morgan failing to acquire Bear but nonetheless remaining on the hook for billions in potential losses from Bear trades gone awry. Holding negotiating leverage for the first time since the crisis began, newly minted Bear CEO Alan Schwartz pushed JP Morgan
CEO James Dimon to up the final offer price from $2. In the ensuing week-long fracas, Bear once again appeared headed for bankruptcy, this time via a Chapter 7 liquidation that would have put downward pressure on securities prices around the world. With the Fed’s reluctant approval,
Morgan finally increased its bid to $10 per share for a total transaction value of $1.2 billion. The
Fed lent JP Morgan $30 billion, taking Bear’s mortgage holdings as collateral. Morgan assumed responsibility for the first $1 billion of any potential losses, leaving U.S. taxpayers with $29 billion in exposure to Bear portfolios. The transaction was so difficult to value that Gary Parr’s
Lazard approved fairness opinions on both the $2- and $10-per-share offers within the span of one week.
As Dimon began the herculean undertaking of integrating two financial colossi with sprawling, overlapping operations and profoundly different cultures, market observers attempted to make sense of the shocking speed with which Bear went from a viable investment bank to a party with whom no one in the market wanted to trade. Some observers pointed to its extreme leverage and its excessive exposure to risky subprime securities, but many Bear executives, largely off the record, claimed that Bear had fallen victim to a