Yesterday – Sunday – it was reported that JP Morgan bailed-out Bear Stearns by paying its shareholders a measly quarter of a billion dollars. One question plaguing Wall Street is how many other victims of sub-prime mortgages will emerge? Below we assess the winners and losers of this deal and also report some good news: Claims by investors who had accounts at Bear Stearns are not dead!
Winners and Losers?
A year ago, BSC’s stock sold for $150 per share. Last Friday BSC’s shares fell from 57 to 30. Reportedly, as government big-wigs and financial moguls met on Saturday to attempt to salvage BSC, there were discussions with several firms to pay around $15 per share but on Sunday only JP Morgan was left – offering $2 per share. Although BSC faced certain bankruptcy if nothing were done, Bear Stearns shareholders say they are the big losers.
Meanwhile, while brokering a sale of BSC to the highest bidder, our government put up $30 billion in loss guarantees. That’s $100 per warm body in the U.S. This amount also translates to $115 per share of BSC stock. Yes, we as citizens will be exposed to losses of over $100 per share for Bear Stearns’ folly! Who are the real losers? You and me!
Are there any winners? The “efficient market theory” holds that the price of a company’s stock on any given day is what that firm is worth. If so, how did J.P Morgan fare? Today, the first after the BSC deal was reported, JP Morgan’s stock rose more than 10% – a $13 billion increase in total market capitalization!
Meanwhile, shares of other investment banks today lost as follows: Merrill Lynch fell 5%, Goldman Sachs fell 6% and Lehman Brothers lost a whopping 20%! Had J.P. Morgan shares lost only 5%, that firm would have fallen over $6 billion in market capitalization. Thus, as of today, J.P. Morgan is almost $20 billion better off thanks to the BSC takeover. This is two-thirds of the exposure to U.S. taxpayers, which made the $20 billion windfall to JP Morgan possible. Some would call this welfare for the rich. Big winner: JP Morgan
Not too late to recover from Bear Stearns!
Many institutional and individual investors claim they were sold “trash” or otherwise cheated by Bear Stearns. Many fear their claims will disappear after the Bear Stearns bailout. Yet, according to reports, JP Morgan will set aside $5 to $6 billion as a reserve for litigation and arbitration claims against Bear Stearns. Those who lost should contact an experienced securities law firm soon to learn if they should seek recovery.
The law firm of Shepherd Smith and Edwards represents institutions and individuals nationwide with significant claims against Wall Street financial firms. We have handled dozens of claims against against Bear Stearns. We seek recovery of losses for improper actions by firms as well as for broker misconduct . Contact us to arrange a free confidential consultation with one of our attorneys to learn whether we can seek recovery for you or your firm.
Who is/was Bear Stearns?
Founded in 1923, Bear Stearns Companies (BSC) is/was a maverick Wall Street investment banking firm with few friends. Former CEO Allen “Ace” Greenberg, who reportedly issued strange memos including about the cost of paper clips, ruled BSC for decades before being criticized for earning almost $16 million in 1992, his final year (although a paltry sum by today’s standards). Perhaps clairvoyant about his firm’s future, Ace was also rumored to have a hard hat in his office with his name on it.
For decades, BSC was criticized for acting as a “clearing agent” for hundreds of small thinly-capitalized “introducing” brokerage firms. A number of these were actually “boiler room” operations, such as one portrayed in a movie by that name. Brokers at these firms often touted their connection with Bear Stearns to persuade victims to part with their savings. Yet, BSC could not resist the huge profits earned from this operation, primarily from margin interest income it charged investors, many who could not afford these costs or to take the high risks involved in margin trading.
BSC’s most recent CEO is/was “Jimmy” Cayne, who allegedly was playing bridge at his country club as the firm’s largest hedge fund imploded last summer. Sources report he was also playing golf (and perhaps cheating) at the same club. In the firm’s financial game, Cayne’s score last weekend was way over par and, in bridge terms, down 7, doubled and redoubled!
Oddly enough, Bear Stearns faced another bailout situation a decade ago, but as a “bailor” not “bailee”, when an infamous hedge fund “Long Term Capital” threatened to bring down world financial markets. Bear Stearns was the only major U.S. investment firm which refused to participate in the bailout, earning it low marks among its peers. As the saying goes, “what goes around comes around.”
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Profile and Background of JP Morgan Chase
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