Why Didn't the Feds Just Buy Bear Stearns?

Okay, so the Bear Stearns deal is done. JP Morgan puts up $270 (or maybe $236) million in stock--a price which Yves Smith notes is about one quarter the value of Bear's headquarters building (link). The Feds go on the hook for $30 billion as a "special lending facility," heh heh, i.e., a “non-recourse facility to manage up to $30B +/- of illiquid assets, largely mortgage-related” (link). JP Morgan gets the equity in Bear Stearns. The Feds get--ah, let me get back to you on that

The magic word, again, is "nonrecourse," meaning that if the stuff is worthless, the Fed share is, well, $30B +/1. Query, with numbers like that, why didn't the Feds just go the whole way and buy it outright?

More Bear Facts: Kedrosky offers up a Power Point term sheet (link). The term sheet says that Bear Stearns shareholders will get 0.05473 Morgan shares for each Bear Stearns share. Per Yahoo, Morgan last traded at $36.54. So that translates into a value of just a hair under $2 for each Bear share. For a share that traded within the year at $159.36, that pencils out to a top-to-bottom tumble of 98.75 percent.

I see that James E. Cayne who was CEO of Bear Stearns until January, reported holdings of 5,612,922 shares as of last December 21. Using the high-low prices reported above, that would suggest that the value of his holdings has fallen from $894,475,250 to $11,224,914. That’s a kick in the stomach; but of course, even $11 million would be enough to keep most of us in Cheese Whiz through the summer.

But Cayne apparently won’t have to rely on a paltry $11 million. Forbes reported in 2006 that Cayne took $132.14 million in compensation over five years; an average of $27.27 million a year (link). In 2005, Forbes ranked Cayne as the 387^th richest person in America (link).

A news report say that Cayne’s leadership of Bear was “called into question” by the collapse of a couple of Bear-managed hedge funds (link).

Critics of the company said Cayne spent too much time away from the office last year playing golf and bridge as the problems unfolded.

Cayne is the same executive who refused to let Bear Stearns provide support as part of a Federal Reserve-led plan to rescue Long-Term Capital Management in 1998. His reticence was said to deeply anger some of his fellow Wall Street CEOs, and the episode came up every time Bear was reported to be in trouble in recent months.

Afterthought: On sober reflection, I think I’d write this morning’s Bear Stearns post (link) a little differently, although the general drift would be the same. It’s probably not really a going concern v. liquidation issue; I suspect the going concern value and the liquidation value are pretty near the same. But there remains the question of who will maximize the value of the creditor stake after the equity is wiped out. That’s a perfectly appropriate role for an outside stakeholder, be it trustee, or receive, or whatever.