I wonder how many of you have heard about Bear Stearn’s in the past. If you are not that interested in finance it would not come as much of a surprise to me that you haven’t? Anyway, Bear Stearns was a major bank who was widely invested in selling mortgage backed securities. In 2008, the bank was on the verge of destruction and was essentially going to fail. JP Morgan decided to pick them up and put them under their wing but their deal was about the equivalence of what they would offer a homeless person. Here’s what happened:
The case that I am looking into deals with the large banks of Bear Stearns and JP Morgan. In 2008, Bear Stearns nearly looked death in the eyes as the economic crisis was about to begin its rampage on Wall Street. This crisis occurred because of the tightening of credit markets which occurred as a result of investment banks exposure to subprime mortgages. Unfortunately, Bear Stearns was one of the biggest underwriters of complex investments that were linked to these subprime mortgages. By the end of July 2007, two of Bear’s hedge funds were deeply invested in subprime mortgages. In December of 2007, Bear Stearns announced its first loss in their 80 year history as they reported a write down of $1.9 billion of holdings in mortgages and mortgaged based securities up from $1.2 billion.
Just a few months later in March 2008, the rumors began to run rampant regarding the financial condition of the corporation along with the financial industry in general. Quickly enough on March 10th Bear Stearns faced a serious liquidity crisis. By March 13th and 14th counterparties were refusing to lend them additional money on customary terms and simultaneously demanded the repayment of outstanding debt. Bear Stearns was essentially left with two decisions: dissolve or merge.
The Federal Reserve would do anything in its power in order to prevent a fire sale which could further depress markets. A decision had to be made quickly before the markets opened up in Asia on Monday March 17th and this became a worldwide phenomenon. A deal for the proposed merger was struck late on March 16th where JP Morgan would acquire the company for $2 a share and the Federal Reserve would support up to $30 billion of funding for less liquid assets. However, the agreement did not go over so well with a number of different people mainly those who were stakeholders of Bear Stearns and thus getting stuck with an extremely low share price for a corporation that had been valued so highly just a year ago. Needleless to say an amended merger proposal was made which altered some of the terms of the original agreement to benefit those who were unsatisfied. The merger ended in a series of lawsuits and with the question of whose fault was this and who was truly acting with an ethically and morally sound base in this situation?
What would Jensen’s stakeholder value versus stockholder value say about this?
Carlson, Robert and Lee, Stephen. “Revisiting the Bear Sterns/JP Morgan Transaction: An Analysis of Deal Protections and Fiduciary Duties”. StayCurrent. 2008 May. Web. 9 February 2013.