On March 6th, two days after the Federal Reserve's decision to bail out Bear Stearns, U.S. Treasury Secretary Henry Paulson expressed his support for the Fed's rescue, believing it was appropriate.
In a television interview that day, Paulson stated that the Fed had taken appropriate action, working with all market participants to minimize the impact of the financial crisis.
He believed that the Fed's rescue of Bear Stearns prevented potentially greater damage to other financial firms and the U.S. financial system.
Paulson expressed confidence that the U.S. financial markets would emerge from the current turmoil, believing that the U.S. economy still had the capacity to recover. He also believed that a strong dollar was in America's best interests.
Was this truly the case?
Last Friday afternoon, Standard & Poor's downgraded Bear Stearns's long-term credit rating to BBB and stated that further downgrades were likely due to the company's liquidity shortage.
Moody's also downgraded Bear Stearns, now three notches above junk stock.
Many analysts believed that Bear Stearns was highly likely to be sold within 28 days of receiving the emergency loan.
Wall Street generally considers JPMorgan Chase and other major banks as possible buyers.
According to Bloomberg, sources have revealed that JPMorgan Chase has expressed interest in acquiring Bear Stearns.
The Wall Street Journal reports that private equity firm JC Flowers & Co. is also a potential acquirer, while the New York Times reports that Royal Bank of Scotland may be interested. Furthermore, Standard Chartered Bank also has the financial strength to make a bid.
Standard Chartered is one of the few major European and American banks not involved in trading subprime mortgage-backed debt obligations (CDOs)—and the reasons are readily apparent.
Therefore, Standard Chartered not only avoided losses during the subprime mortgage crisis, but also took the opportunity to acquire Northern Rock Bank, a bank embroiled in a bank run, thereby entering the British market.
However, Standard Chartered CEO Davis stated in an interview
that Standard Chartered's most important priorities are completing the integration of Northern Rock into the Standard Chartered system and addressing the nonperforming assets accumulated from its reckless lending of residential mortgages. There are no plans for further expansion before this.
"The best option for Bear Stearns right now is to sell it entirely to JPMorgan Chase..."
Back in London, Baron said to Daisy in his office at the DS Financial Center,
"This would prevent Bear Stearns from being broken up... By the time they turned to the Federal Reserve for help, Bear Stearns had already lost its status as an independent bank, and a sale was inevitable."
"Although Bear Stearns is in deep trouble, it still has some valuable assets that are still attractive. Why not seize the opportunity to acquire them?"
In response to Daisy's question, Baron replied calmly,
"You're right. Although Bear Stearns has been put on the market, it's still a valuable asset. The problem is, not every piece of this valuable asset can fall into our grasp. We're surrounded by wolves. We can only choose the one that suits us best, otherwise we'll attract too much hatred."
Sure enough, on March 7th, JPMorgan Chase announced it would acquire Bear Stearns for the bargain price of $2 per share, totaling $236.2 million.
This price represented only 1% of Bear Stearns's previous market capitalization of $20 billion.
However, their ultra-low offer was strongly resisted by Bear Stearns shareholders, who claimed that if the acquisition conditions were like this, Bear Stearns would seek other acquirers...
Finally, after many negotiations, on March 14, JPMorgan Chase reached a new agreement with Bear Stearns. In this new agreement, JPMorgan Chase agreed to increase the share exchange ratio, effectively raising its offer price from $2 per share to $10 per share, for a total of $1.19 billion. JPMorgan Chase would also purchase 95 million additional Bear Stearns shares, raising its stake to 39.5%. Bear
Stearns shareholders were somewhat reluctant, but the situation was stronger than they thought. If they refused to agree to this offer, they would likely face capital withdrawal and the collapse of Bear Stearns.
After all, at this point, even other acquirers would find it difficult to offer a better deal—who had caused Bear Stearns to reach this point?
Relatively speaking, the possibility of being acquired by JPMorgan Chase and exchanging Bear Stearns shares for JPMorgan Chase shares would still result in heavy losses, but at least there would be a chance of recovery.
This was their best option.
It's worth noting that Bear Stearns's current situation, becoming the first of the five major Wall Street investment banks to be acquired during the subprime mortgage crisis, was not without reason.
While Wall Street investors inherently embrace the law of the jungle, no other bank stepped forward to help Bear Stearns during the period of intense media coverage and pessimism about the company. It's a case of "you reap what you sow," as Bear Stearns
had previously treated other members of Wall Street with similar disdain.
The seeds of today's outcome were arguably sown at least a decade earlier.
In 1998, it was Bear Stearns, under the helm of Cayne, that refused to join its Wall Street peers in the Federal Reserve-backed bailout of the highly leveraged hedge fund Long-Term Capital Management.
After its refusal to help save LTCM, Bear Stearns became a true outcast, with virtually no friends among other banks or regulators.
When the crisis unfolded, no one publicly refuted the initial rumors surrounding Bear Stearns, despite having helped Lehman Brothers, which had been plagued by similar rumors just two weeks prior.
Bear Stearns' reputation for going its own way ultimately cost it the trust of Wall Street.
This was also the main reason Baron didn't participate in the Bear Stearns acquisition. After all, the people behind the Wall Street capital wanted to be the ones to bring about the "end" of Bear Stearns. If Standard Chartered Bank intervened, it would easily incur public outrage.
Furthermore, Bear Stearns, unlike Merrill Lynch, did not have commercial banking operations in the United States, making it an unsuitable target for Standard Chartered Bank to acquire.
Given this, he simply needed to quietly earn a satisfactory profit by shorting Bear Stearns.
Well, it wasn't just Bear Stearns; the impact of this incident caused bank stocks across the United States to plummet, and the Black Swan Fund also expanded its gains from the subprime mortgage crisis.