Did The Fed Push Bear Into a Bad Deal?

Source : WSJ

"The Fed did not learn how bad Bear’s condition was until Bear and the SEC told the Fed late Thursday March 13, and at that point, the firm said it saw little option other than to file for bankruptcy by Friday morning. The Fed pushed Bear to find a private sector buyer before markets opened Friday, but Bear couldn’t. At 7 a.m. Friday the Fed, for the first time in its 95 year history, approved a direct loan to Bear, a step so extraordinary it required the use of two special loopholes in the Federal Reserve Act. The Fed’s priority wasn’t to minimize losses for Bear shareholders but to prevent uncertainty over Bear’s fate from causing the derivative and repo markets to dry up, which meant finding a buyer if at all possible before Monday."

" “We thought they gave us 28 days. Then they gave us 24 hours,” one person familiar with Bear told the Journal last week. J.P. Morgan’s deal for Bear Stearns has several unusual features that make the deal particularly favorable to J.P. Morgan and comes at the expense of the shareholders of Bear Stearns, who are losing billions on the $2.40 a share offer."

Wasn't Bear looking for private solutions for several months leading up to the day they intended to just implode? If the management was so out of touch, there is nothing much to say to the share holders besides that they were misled by the Bear Stearns Management Team on the health of the organization.

As regards Fed action, policy and the deal. By changing the name of the problem, it does not make the monetary problem go away. Currently the Bear share holders are bag-holders while some of the instruments that are transferred to JP Morgan Chase are still the underlying cause for the demise of the bear and those investors will need to be communicated at some point that bear made bad investment choices with their capital and that there are losses that cannot be replenished by JP Morgan Chase.