U.S. News

Bear’s Stock Becomes a Battlefield

Andrew Ross Sorkin|The New York Times

Only days after the fire sale of Bear Stearns stunned Wall Street, a battle seems to be brewing in the markets over the fate of the troubled investment bank and the controversial deal that JPMorgan and federal authorities devised to save it.

In one camp are Bear’s bondholders, who are pushing for the deal in hopes of keeping the beleaguered firm out of bankruptcy and of safeguarding their investments.

In the other camp are Bear’s shareholders, including many of its employees, who hope to scuttle the deal and secure a higher price for their stock.

In another frenetic day on Wall Street, both sides rushed to buy shares of Bear on Tuesday. By late morning, the shares had soared as high as $8.50 — more than quadruple JPMorgan’s $2-a-share offer price. The shares closed up $1.10, at $5.91, in heavy trading.

Bitter Bear Stearns

The frenzy underscores the cloud of uncertainty that still hangs over the deal, struck late Sunday at the urging of the Federal Reserve and the Treasury Department. It also points to the often opaque ways of Wall Street arbitragers, the traders who wager on whether proposed deals will be completed.

Emotions are running high. At Bear’s Madison Avenue headquarters, officials from JPMorgan have assumed control of all operations. Nonetheless Wall Street buzzed with rumors on Tuesday that angry Bear employees were teaming up with outside investors to buy Bear stock to force JPMorgan to increase its $236 million offer or to lure a higher bid from a rival bank.

Holders of the more than $300 billion in Bear Stearns bonds, in the meantime, are purchasing Bear stock to strengthen their hand in voting for the deal, thus guaranteeing that their bond investments will retain the backing of JPMorgan and its guarantor, the Federal Reserve Bank of New York.

The stock’s surge is the latest chapter in a week of tumultuous trading in the investment bank’s shares. Last week, shares in Bear plunged from $64 to $30 as rumors spread through the market that clients, counterparties and lenders were pulling their money from the firm.

On Tuesday, the Securities and Exchange Commission said that it had opened an investigation into whether investors spread false rumors about the company’s health while taking short positions, or investment bets that the value of Bear’s stock would go down.

But in assessing the stock’s unlikely ascent this week, investors and hedge fund executives said on Tuesday that the bulk of the buying was coming from bondholders and that speculators hoping for an increased price or a voided deal were on shaky ground. On Tuesday, one big investor, the Chinese financial firm Citic Securities, walked away from its proposed $1 billion investment in Bear, a deal that it struck last fall.

“The large bondholders are buying stock because they want the deal to go through,” Michael Holland, an investor in financial stocks at Holland & Company, told The New York Times. “The screamers are on the equity side, but they have no economic standing. There is no arbitration significance here.”

Backing this view is the notion that there are few financial institutions with the standing and financial health to be seen as a better alternative to the combination of JPMorgan and the Federal Reserve. And even if a buyer swoops in with a higher price, it is unlikely that the Federal Reserve Bank of New York would extend to the new buyer its guarantee of Bear’s $30 billion in risky assets.

Supporters of the deal also point to the many billions of dollars of litigation risk that JPMorgan is taking on should investors who lost money in Bear’s hedge funds, as well as its stock, file lawsuits. JPMorgan has the added advantage of having a right to move into Bear’s headquarters, even if the deal is voted down.

And time is running out. JPMorgan has said that it plans to have the deal ready for a vote by the end of the second quarter, but people involved in the transition talks say the bank is pushing for a closing as soon as the end of May.