Bear Stearns stock has plummeted, but not all the way down. The troubled bank’s shares actually climbed on Tuesday, up $1.93 to $6.75. That represents a massive premium over the JPMorgan’s agreed price of $2 per share (actually, 0.05473 JPMorgan shares).
The exact reasons are unclear. A rival bid or a sweetened JPMorgan offer is possible but unlikely, given the Fed’s stamp of approval on the existing deal. Dow Jones reports that investors who profited from the bank’s cratering stock may merely be covering their short positions.
The biggest factor may lie elsewhere. A trading source told Fortune’s Roddy Boyd that two groups of interested parties are piling into the stock so that they can vote in favor of the JPMorgan deal — taking a loss on the spread between share price and the JPMorgan offer, but protecting their positions in Bear Stearns bonds and credit default swaps.
Spreads on Bear Stearns CDS soared to 1,000 basis points Friday - meaning it cost $1 million to insure against a default of $10 million face value of bonds. Those spreads have since narrowed to around 350 basis points, or $350,000 per $10 million in insurance, in light of the prospect that JPMorgan Chase will take over Bear’s obligations. So a seller of a Bear Stearns credit default swap on Friday, having taken in $1 million in premium, can now turn around and protect himself against a default in Bear Stearns for $350,000. That translates into a $650,000 gain -and the potential profit stands to get bigger as the close of the transaction approaches and Bear spreads move more in line with JPMorgan’s, which are around 115. Those dynamics give hedge funds a big incentive to make sure the deal goes through.
Beyond the credit default swap trade, there’s another group interested in making sure JPMorgan winds up owning Bear Stearns. Holders of Bear Stearns debt want the deal to go through so they won’t end up fighting with other creditors in bankruptcy court over the remains of the firm - the likely outcome if Bear shareholders turn the deal down.
Photo: Canada-Photos.com
Trackback
6 comments so far
Hi All –
I work with a law firm that is investigating Bear Stearns, and whether the company protected employees’ interests during the recent stock collapse. Many Bear Stearns employees saw their retirement accounts decimated by recent events, and some are questioning whether Bear Stearns acted appropriately.
Specifically the firm is looking into whether Bear Stearns lived up to its fiduciary duty to employees who held Bear Stearns stock as part of the company’s pension plan.
If you are a Bear Stearns employee and are concerned that the company’s actions hurt you or your pension plan, you may want to contact Hagens Berman Sobol Shapiro (www.hbsslaw.com/bsc or info@hbsslaw.com) to learn more about the investigation or call the firm at 206-623-7292.
- Posted by Easton RichmondCan some one please explain to me how the stock market was able to magically twist a 53% and 57% drop in revenue for Goldman and Lehman Brothers combined with a continued drop in housing and new permits, topped off with inflation number for the Producer Price index into a call to rally.
Combine this with the fact that thanks to Uncle Ben, my interest income on saving and CD’s is tanking…I feel like I am living in a world where the inmates have taken over the asylem. Nice to know the “old school ties” are keeping the “old boy network” safe and happy in their Greenwich homesteads.
- Posted by germaine marieShould Shareholders Have Been Able to Replace the Bear Stearns Directors? Although the speed with which it met its demise might have come as a shock to just about everyone in the worldwide financial community, there was a fight underway by disgruntled shareholders to replace several members of The Bear Stearns Board of Directors earlier last year. This weekend’s demise of Bear Stearns did not end the debate over who should have a right to elect the Directors of companies. The question of whether of Bear Stearns Board of Directors service on other corporate boards will come in for more scrutiny remains a question to be answered in the coming days.
- Posted by NewsVisualIt’s wonderful to see how all these arrogant bears getting their comupence and ending up penniless and jobless. It’s great irony because they were so arrogant like the yahooligans and those dot commers that used to have their flashy jobs and cars. Now they have nothing! I love to see them suffer, it just makes my day and warms the cockles of my heart!
- Posted by Jevon Price[...] Wednesday links: hedge fund scam 19Mar08 Bear Stearns (BSC) stock stubbornly trades above the $2 a share buyout price. (Market Movers, Big Picture, Interfluidity, WSJ.com, DealBook, DealZone) [...]
- Posted by Wednesday links: hedge fund scam « Abnormal ReturnsTo germainemarie
- Posted by the knowledgeMaybe it is because it has been an extremely tough quarter where numerous firms have been forced to hugely write down their asset values. despite intense scrutiny and speculation lehman and morgan posted modest (but respectable) profits. which showed that the spillover effects from bear were not nearly as drastic as imagined on monday.
thats why the market rallies. also you are suffering as is every one else who invested in the market. suck it up.