JUDY WOODRUFF: Now, the revised deal to take over Bear Stearns. Wall Street learned today that JPMorgan Chase is willing to pay $10 a share for the investment bank Bear Stearns. That is five times more than the initial offer of $2 a share announced a week ago at the prompting of the federal government.
Here to tell us why and what questions all this is raising is Andrew Ross Sorkin. He is a reporter and a columnist for the New York Times.
Andrew, good to have you with us again.
ANDREW ROSS SORKIN, New York Times: Thank you, Judy.
JUDY WOODRUFF: Why was another deal necessary?
ANDREW ROSS SORKIN: Well, you know, it’s funny. It looked like last week, when they originally struck this $2-a-share deal, that they had skirted bankruptcy and saved the day, if you will, financially.
And you have to understand: This was a three-way deal, really. You know, it was between JPMorgan and Bear Stearns, but really there was another player that was very influential, and that is the Federal Reserve.
And, frankly, also, the Treasury Department, which was pushing this deal, trying to make sure that Bear Stearns remained solvent, in part so that the markets didn’t fall apart completely.
But what happened over the past week was that shareholders became irate. There was a feeling that the $2 a share was just too much of a bargain-basement price, that they weren’t getting their full and fair value. And a cloud started forming over the company as to whether the deal would be completed or whether the company itself would collapse.
And so you had a couple of things happening. You had investors who decided, “I’m not doing business with Bear Stearns because there’s too much uncertainty.” And you had employees, the assets of the company, which walked in and out of the building every single day, starting to walk out of the building and not coming back.
And so JPMorgan and the Federal Reserve decided to make this deal happen. They needed to guarantee it; they needed to create certainty. And the only way to do that at that point was to raise the price and to make sure this thing was actually going to happen.
Fed price intentionally low
JUDY WOODRUFF: Well, explain, why was JPMorgan Chase willing to pay a higher price for a company that was about to go under?
ANDREW ROSS SORKIN: Well, I think there's a couple of reasons. First, the $2 a share was actually sort of out of thin air. This was a company that was worth zero.
I mean, you have to understand, Bear Stearns was effectively a bankrupt company as of last Friday night, when JPMorgan stepped into the breach. And, effectively, the Federal Reserve helped press them to pay $2.
Now, they were actually prepared originally to pay slightly more than that. But I think there was what people describe as the moral hazard. I think the Federal Reserve didn't want to appear as if they were helping to bail out the fat cats, if you will, and help them get fatter.
So there was something to be said about making sure that Bear Stearns' shareholders at least suffered for all the risks that the company had taken.
JUDY WOODRUFF: And why then -- explain why the Fed is going along with all this?
ANDREW ROSS SORKIN: Well, there's the larger issue, and this is the question that I think is going to be raised. It's the $2 question, the $10 question, or the $1 billion question as to whether the Federal Reserve should be bailing out banks.
You know, this has only happened so far with Bear Stearns. There were rumors last week about Lehman Brothers and others that could run into trouble.
But the issue, the larger issue is whether the Fed should be bailing these companies out and whether, by doing that, they're literally helping Wall Street or they're helping everybody.
Now, the Federal Reserve would say, "We're trying to help everybody." And to understand the issues at Bear Stearns, you know, Bear Stearns was going to be insolvent. And that meant, if you and I, Judy, were going to bet on a basketball game tonight, for example, you know, I don't really want to bet with you if I don't think that you're good for the money.But the bigger problem is, if I already made 10 bets with you yesterday and I don't know if you're going to pay me, and so there was this idea that there would be this ripple effect throughout Wall Street that would affect everybody, that all of these firms were so intertwined, and that the Federal Reserve needed to make sure that Bear Stearns stayed alive to ensure that everybody else stayed alive.
JUDY WOODRUFF: How much are American taxpayers on the hook here? Now, are they more on the hook as a result of the new deal or is it a wash?
ANDREW ROSS SORKIN: Well, they're slightly less, but not much. American taxpayers are on the hook for $30 billion. So what happened last week originally was that the Federal Reserve agreed to take what would arguably be the most toxic assets that Bear had.
So put all of the mortgages that you think are -- that deadbeats are never going to pay you back, take all those mortgages, you put them in a folder, you give them to the Fed, and you say, "Here they are," and that's what the American taxpayer is taking on.
Now, it could be that in time those mortgages are actually worth something and the guys actually pay it back. I should tell you Long-Term Capital, a hedge fund that went under in 1998 and was rescued, frankly, by the Fed, those assets were transferred to the Fed, and the Federal Reserve actually made money, so the taxpayers made money on that deal.
But in this case, the government is taking on $30 billion of assets. But what changed this week was that JPMorgan made it slightly better for the U.S. taxpayer by saying, "You know what? If you lose up to a billion dollars on those assets, if there are losses, you call us, and we will take care of the first billion dollars of losses."
So that is one change that is slightly better for the American taxpayer this evening.
Fed helps cushion impact
JUDY WOODRUFF: So worst-case scenario is what?
ANDREW ROSS SORKIN: Worst-case scenario is that the U.S. taxpayer is literally on the hook for $29 billion, probably unlikely that they'll be on the hook for all of that, but it could be.
And the great thing about the Federal Reserve is, unlike most other institutions, they can wait this out. So people who would otherwise need to sell their home, the Federal Reserve doesn't need to sell these assets. They can hold onto these for 5 or 10 years and perhaps make their money back.
JUDY WOODRUFF: And best-case scenario, what would a successful outcome be here?
ANDREW ROSS SORKIN: Well, a successful outcome would be that actually these assets are not nearly as bad as we thought, that the entire subprime debacle looks bad now, but five years from now will be just fine and that they will have actually -- that the government will have actually made money on this deal.
JUDY WOODRUFF: And, Andrew, what would have happened if this had not been worked out? I mean, Bear Stearns' price shareholder -- or rather share price was rising today.
ANDREW ROSS SORKIN: Well, if this deal hadn't happened, there's two possibilities. One is that Bear Stearns would have actually gone back into bankruptcy. Even though the stock was going up, they would have landed back in bankruptcy, and that might have been actually good for the shareholders.
Some shareholders said, "You know what? At $2, we're worth more. Even the building itself, the headquarters of Bear, is worth $1.2 billion, so we should get something for that."
The alternative is there was some view that another bidder could have come in and bought this company and done more with it. You know, it's anyone's guess.
JUDY WOODRUFF: And just quickly, how solid is this agreement? I read that there are still some lawsuits out there.
ANDREW ROSS SORKIN: There's going to be a number of lawsuits. It's a pretty solid deal that probably will get completed within actually the next two weeks.
One of the most unusual terms in any deal that I think we've ever seen is, in this deal, shareholders have to vote -- a majority, 50 percent have to vote in favor of the deal. As part of the deal today, however, JPMorgan literally on the spot bought 40 percent of the company. So they already own 40 percent. So all they need is 10 percent of the shareholders, the outstanding shareholders to vote in favor of the deal, and that look pretty certain.
JUDY WOODRUFF: All right, Andrew Ross Sorkin, it's good to see you again. Thanks.ANDREW ROSS SORKIN: Thank you, Judy.