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The Ol' Wall Street Bailout


Expect to see more of the same.

A lot has been written both on Minyanville and in the press regarding the JP Morgan (JPM)-Bear Stearns (BSC) transaction, but let me share a couple of additional thoughts:

First, this deal followed the "classic" bank bailout model. The "weak" firm closed on Friday and opened in the arms of the "strong" firm on Monday. There was a significant financial incentive "paid" to the buyer by the regulators and as a result the stock of the "strong" buyer traded up. The shareholders of the "weak" firm were eviscerated in the transaction.

Second, while the papers suggest there was interest on the part of private equity firms in Bear, there is no way that the regulators were going to have any uncertainty. As the "strongest" bank in America, JP Morgan was (and I believe still is) the only buyer for Bear Stearns. (Private equity firms will be more than welcomed later in the process when far smaller institutions fail and "vulture" opportunities abound. But to be clear systemic risk will be handled within the system.)

Third, watch for this model to be repeated over and over, and, given yesterday's "success", now on an accelerating basis. As a result of these transactions, the "strong" will get stronger and the "weak" will be gone. The cleanup has begun.

Finally, and unrelated, if the Fed drops the Funds rate this afternoon by 100 bp's, watch for the Prime rate to decouple from Fed Funds. My guess is that the Fed will encourage banks to only drop their Prime rates by 50 bps.
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Position in SKF, JPM debt
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