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Behind the Deal, the Hand of the Fed – New York Times March 30, 2008

Posted by davidzweig in economics.
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The fire sale price paid by JPMorgan for Bear Stearns was apparently driven by the Federal Reserve, and to some extent by Treasury Secretary Henry Paulson. This should lay to rest the canard that Chairman Ben Bernanke is a patsy. The article in the New York Times excerpted below is not to be missed.

We’ve just seen the Federal Reserve run a bulldozer back and forth, back and forth through through the rose garden of NYSE rules and the Delaware Chancery.

In Las Vegas, the casino is called “the bank”. The bank makes the rules.

In New York, the Fed makes the rules.

Have no doubt: we are living in unusual times.

Behind the Deal, the Hand of the Fed – New York Times

The truth is, the Fed preferred the $2 price [per share, offered by JPMorgan for Bear Stearns] because of the obvious message it sent to the rest of the market, but in the end it went along with the new agreement [that raised the price to $10], in part because it worried that failure of the deal might overwhelm the markets. And they got a giveback — JPMorgan is on the hook for the first $1 billion in losses.

Even then, the Fed’s fingerprints were all over the new pact. In an action almost unprecedented in takeover history, JPMorgan bought 39.5 percent of Bear on the spot to ensure that it would have close to a majority of the votes to approve the deal. That agreement completely disregards New York Stock Exchange’s rules that prevent anyone from buying more than 20 percent of company without a shareholder vote. Other parts of the new agreement either stretch the rules or disregard years of precedent in Delaware, where both banks are incorporated. Of course, all this rule-bending was done with the tacit, if not outright, approval of the federal government.

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