Sunday, March 23, 2008

Did The Fed Come To The Aid Of Bear Stearns Or J.P.Morgan?

Usually when one company decides to merge or takeover another company it is because there is some synergies and economic benefit to the two companies combining resources. A few months back Bank Of America decided that Countrywide Financial was a good value at around $17 a share when they did a 2 billion dollar convertible deal. The stock now trades at $5.87. In the spirit of throwing good money after bad, Bank of America decides to take over Countrywide as it traded significantly lower that the convertible deal. The conclusions that can be drawn are either Bank of America didn't do its due diligence in investigating the problems with Countrywide Financial, they underestimated to credit environment in the United States, or there were other considerations in taking over the company.

One thought that comes to mind, is that Bank of America was most likely tied to lending money to Countrywide and was holding a significant amount of paper that it was going to take a long time to recoup its value. So one attempt to help the situation was the convertible deal at $17. When that didn't solve Countrywide's problems, the problems were now Bank of America's problems. So as the price continued to drop, Bank of America finally stepped in and bought the company. This purchase was probably a-have-to type take over.

Countrywide Financial - CFC (click t0 enlarge)

Bank of America - BAC

Now that JPMorgan has made an offer for Bear Stearns, why should be a question that people are asking. Is it because it was a good deal for JPMorgan or was it because they were financially tied to Bear Stears in all kinds of CDOs and other financial assets that have become totally illiquid? Was this a deal entered willingly or was this done out of necessity? While the Federal Reserve did back all the paper that JPM is taking on from the Bear Stearns deal, the question still exists why did JPM decide on this deal?

Paying $240 million for this company seems like a very low number. The headquarters building of Bear Stearns is estimated to be worth over $1billion. Likely this week there will be talk of JPM increasing the offer for Bear Stearns, this is most likely to quell talk that this deal was not good for shareholders. The $2 offer was a token offer to shareholders. Was the company worth less? If it wasn't for the Fed stepping in it would be trading at zero, and all the paper held buy the company would have traded at ridiculously low values, but it would have helped to cleanse the system. With the JPM deal, the waters are just muddier. There will be more events to come, and this deal will be seen for all it really is.

JPMorgan Chase and Co.- JPM

Bear Stearns Companies - BSC

Cramer's Take On Bear Stearns

The chart below is the S&P 500 Index. As prices approach the 1350 area, it is a good place to take profits on any long positions and leg into short positions.

S&P 500 Index (click to enlarge)

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