This is a case of putting it all together - and while I only play an economist on this blog, my sense is that Andrew Ross Sorkin had it right in Tuesday’s New York Times:
“Perhaps the Fed never set the exact price, but the notion that it didn’t press JPMorgan to pay as close to zero as possible doesn’t square with reality.
….
[Treasury Secretary Henry Paulson] was desperate to demonstrate to Main Street that he wouldn’t rescue Wall Street on the government’s dime, even though that’s exactly what he did, by providing a $30 billion backstop to the deal. (And he may have been right to do so.)
But the night that Bear signed the original bid [for $2 a share], the Fed opened what’s known as the discount window to companies like Goldman Sachs and Lehman Brothers — oh, yes, and to Bear, too. Except that the Fed didn’t tell Bear that it planned to open the window when it was signing its deal with JPMorgan.
Had Bear known it might have access to the discount window — a crucial source of liquidity — it might have been able to hold out for a couple more days or at least had enough leverage to seek a higher bid. But the Fed clearly preferred the original bid.
Inside Bear, jaws dropped at what many considered a broad deception by the Fed. Alan D. Schwartz, Bear’s chief executive, was furious, as was the board and its team of advisers. Several JPMorgan executives even offered their apologies about the way the deal ‘went down.’
Of course, shareholders were even more irate, describing the deal in unprintable terms. In effect, they revolted against the terms of the deal — and both JPMorgan and the Fed wound up having to mollify them by raising the price.
Had the deal died, Bear would once again be risking bankruptcy, and the market would once again be risking turmoil. (Bear shareholders seem to think they still might have another chance, though, bidding its shares on Monday up to $11.26 a share.)
Still, the Fed almost derailed the $10-a-share agreement. Just as JPMorgan and Bear were about to consummate the deal on Sunday night, the Fed started raising questions about the price, people involved in the discussions said. The deal makers were forced to delay announcing the deal until Monday morning while the Fed hashed through ‘the optics’ of the deal, as one participant described it.
The truth is, the Fed preferred the $2 price because of the obvious message it sent to the rest of the market, but in the end it went along with the new agreement, 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.
If that’s not deal-making, Fed style, what is?”
Indeed.
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