Questions abound on Bear Stearns buyout


Stunned Bear Stearns shareholders who saw investments virtually wiped out overnight when a takeover deal with JPMorgan Chase was unveiled are demanding to know how it was put together in the first place.

For instance, they - and Washington lawmakers - want answers on how the deal was arranged, and gained government approval and financing, all in a few hours, and seemingly without alternative bidders being canvassed.

They also have a host of questions about the role of the Federal Reserve and the Treasury Department in engineering the emergency deal.

So far, some crucial details remain murky.

“Under the circumstances, shareholders should be entitled to know just about everything,” said James Melican, chairman of shareholder advisory firm Proxy Governance Inc, which is expected to make a recommendation to investors on whether or not the deal should be approved.

“There needs to be full disclosure of exactly what happened over the weekend,” he said. Investors have “an absolute right to know whether or not there is any other alternative mechanism that could either keep Bear Stearns in business or at least have them get a more appropriate price for their shares.”

Billions of dollars in shareholder value has been wiped away in the last week. Based on current market prices, the takeover is valued at $2.41 a share, a shockingly low offer compared with Bear's $159 stock price last April.

Another highly unusual aspect of the deal is the way JPMorgan Chase & Co has been allowed into the Bear Stearns Cos Inc headquarters to provide “management oversight of its operations.”

If shareholders were to reject the JPMorgan offer, JPMorgan still would have been in a position to understand everything about Bear's trading strategies, staff quality and assets.

JPMorgan even has an option to buy the Bear Stearns' building if the deal collapses.

The US Congress also wants answers, particularly on the involvement of the Federal Reserve in pushing the deal, which came as Bear Stearns faced a sudden cash crunch and possible collapse. In an unusual move, the Fed agreed to lend $30 billion to fund illiquid Bear Stearns assets to help seal the takeover.

Among the unanswered questions are: Were other parties asked to bid on Bear Stearns, or did the government solely approach JPMorgan about the takeover? Were any overseas banks or private equity firms asked to consider a bid, or did the buyer have to be a large US bank?

Also, how did the Federal Reserve arrive at the $30 billion figure and did it discuss with Bear whether it was preferable to arrive at a quick sale or explore a bankruptcy filing? How could due diligence be done and the deal approved in the space of a few frantic hours on Sunday? And how can a party taking over another be allowed to run the target before the deal has gone through?

With so many unknowns, the US Senate Finance Committee is reviewing the sale and particularly what implications it may have for taxpayers. On Thursday afternoon, The committee's top Republican, Iowa Senator Chuck Grassley, said he wanted details of the Fed's financial support of the deal, as well as how Bear insiders were being treated under the buyout.

In the House of Representatives, the chairman of the House Oversight and Government Reform Committee also wants to know more. The committee is conducting a “preliminary review” of the deal, an aide to Democratic Rep. Henry Waxman of California, who chairs the panel, said on Thursday.

A decision on whether to launch a more formal investigation or to hold committee hearings could take several weeks, said the aide, who declined to be identified. The aide added that the Bear Stearns developments dovetailed with separate hearings that Waxman's committee has conducted on compensation packages for top executives at troubled firms.

Some questions should be answered when the companies disclose the merger proxy, which must include more details about how the deal was hammered out and whether other potential bidders were contacted.

The SEC is always concerned “that the entire background of the merger be set forth,” Melican said. “They're always very insistent on that, even in a normal case. I would think in this case, they would be even more so.”

Also, if there are any legal challenges, Bear Stearns and JPMorgan could be forced to cough up more details, experts say.

Another unanswered question, experts say, is what forced the Fed to step forward. Sanford Brown, who previously worked in the Office of the Comptroller of the Currency and is now an attorney at law firm Bracewell & Giuliani, wanted to know when the government realized problems were on the horizon.

“Two years ago, the research guys at the Fed and the FDIC probably saw this coming,” he said. “Why didn't they come in sooner? Somebody along the way should have said 'stop ... we're creating too much risk in the system.'” (Reuters)

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