JPMorgan Chase on Monday increased its offer for the investment banking giant Bear Stearns by about $2 billion, putting down a shareholder...
JPMorgan Chase on Monday increased its offer for the investment banking giant Bear Stearns by about $2 billion, putting down a shareholder revolt and all but guaranteeing that the wounded Wall Street firm would be sold before its troubles spread to the rest of the financial system.
The deal had been threatened by Bear Stearns shareholders, who saw their fortunes nearly wiped out last week when the firm agreed to be bought for a paltry $2 a share in a deal engineered by the Federal Reserve.
The hastily arranged transaction was to prevent a bankruptcy that could have led to a string of other investment bank collapses.
As part of Monday’s deal, the Fed’s role was also renegotiated. The central bank originally had agreed to put public dollars on the line to guarantee $30 billion of risky mortgages owned by Bear Stearns.
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In the reworked deal, JPMorgan agreed to cover the first $1 billion in losses if the value of those securities falls, with the Fed responsible for any losses beyond that. The change should sharply reduce the Fed’s risk of loss.
The New York Fed, which played a leading role in the negotiations, also provided more detail about how this multibillion-dollar government guarantee will work. The Fed will place the securities in a newly created limited liability corporation and hire BlackRock Financial Management to sell the securities gradually to minimize the market disruption.
Some of Bear Stearns’ shareholders are still unhappy but they now have little choice but to accept it.
JPMorgan was able to buy a 39.5 percent stake in Bear Stearns as a result of the new negotiations. Together with previously owned shares and pledges of support from Bear Stearns’ board of directors, JPMorgan has a lock on the majority it needs to win shareholder approval for the deal, according to a banker involved in the negotiations.
The deal is slated to close April 8, he said.
“It’s a done deal from a shareholder-vote perspective,” said the banker, who asked for anonymity because he was not authorized to talk publicly about the negotiations.
Even at the higher price, the acquisition of Bear Stearns is a major coup for JPMorgan’s chief executive, Jamie Dimon.
Ten years ago, his career seemed over after being forced out at Citigroup by his former mentor, Sanford Weill. Dimon returned to Wall Street as the head of JPMorgan two years ago; since then, JPMorgan has surpassed Citigroup in market value.
In Bear Stearns, Dimon is getting one of Wall Street’s top brokerage businesses, one long the envy of its peers. And he is getting it on the cheap. Two weeks ago, Bear Stearns was trading above $70 a share.
“Certainly it is a fivefold better deal for the shareholders,” said George Ball, chairman of the brokerage firm Sanders Morris Harris. “And I think Jamie Dimon is delighted to pay a higher price to have a crew at Bear Stearns that might be sullen as opposed to outright riotous.”
The original deal was so urgently assembled that some of those responsible for putting the offer together did not sleep for days or camped out in their offices, according to people involved in the negotiations.
Normally, the due-diligence review for a buyout of that size takes four to five weeks. JPMorgan had 36 hours.
Almost since the ink was dry, there were discussions between the banks involved and the New York Fed about adjusting the terms. Negotiations proceeded along two separate but related tracks.
One set of talks, between JPMorgan and Bear Stearns, was over the sale price. The other, between JPMorgan and the New York Fed, was over how much the government could reduce its guarantee.
Friday, with no one else willing or able to buy Bear Stearns, its executives offered Dimon the 39.5 percent stake. That “really started the action,” said a person involved in the negotiations. In return, Dimon agreed to raise the buyout price.
JPMorgan and Bear still needed the Fed’s acquiescence to reopen negotiations. New York Fed President Timothy Geithner, with support from colleagues on the Fed Board of Governors in Washington, D.C., and top officials at the Treasury Department, used that as leverage to negotiate the new deal.
The Fed worked out an agreement that would allow it to keep all the profit if it sells Bear’s risky assets for more than $30 billion.
And the concession by JPMorgan to take on the first $1 billion in losses significantly reduces the risk the central bank will take a loss.
After a weekend-long scramble to iron out the details and more sleepless nights, a new agreement was fashioned early Monday. The Bear Stearns board approved it after 8 a.m.
The new deal is valued at $2.31 billion, according to Washington Post calculations.
Some analysts were still concerned about taxpayer risk.
“I do think the Fed was correct in a belief that the fall of a domino the size of Bear Stearns would have precipitated an implosion of the financial system,” said Ball, the Sanders Morris Harris chairman.
He added that the Fed is still putting taxpayers at risk and “will take a good deal of political heat for it,” including in congressional hearings that are examining the Fed’s exposure to Bear Stearns securities.
Washington Post reporter Alejandro Lazo and researcher Richard Drezen contributed to this report.