New Bear deal better for taxpayers

Everyone seems to benefit from Monday’s renegotiated JPMorgan (JPM) purchase of Bear Stearns (BSC). Bear shares more than doubled, to $12.30 a share, after JPMorgan agreed to raise its all-stock bid for the cash-strapped brokerage firm to $10 a share from $2. There seems to be little reason to believe that the price will go even higher, given the provision in Monday’s deal that will allow JPMorgan to buy almost 40% of Bear even before a shareholder vote takes place. Accordingly, JPMorgan shares rose as well, as investors applauded the prospect that the deal can close soon - and that costly and time-consuming litigation can be avoided.

Meanwhile, U.S. taxpayers will benefit from a provision that reduces the Federal Reserve’s potential exposure to bad loans on Bear’s books. The New York Fed originally agreed to finance $30 billion worth of Bear’s assets without recourse, but the revised agreement has JPMorgan shouldering the first $1 billion of losses on that paper. Among other things, that arrangement should reduce criticism that the Fed is bailing out well-heeled investors at the expense of the public.

Likening the new structure to the deductible on an insurance policy, Jeff Miller points out at a Dash of Insight that the Fed’s motivation for arranging the Bear sale “was to avoid the systemic failure that might have started with Bear’s counterparties. The new deal terms accomplish this with a better alignment of risk and reward.” Seems like there’s not much to argue with there.