JP Morgan’s “rescue” of Bear Stearns, backed by the US Federal Reserve’s $US30 billion line of credit, could be under threat.

As we saw with the battle for control for failed UK mortgage bank, Northern Rock, regulators can make a rather large rod for their backs when they get involved in the rescue of a listed company, no matter how noble the cause.

In the US there’s a similar battle breaking out over Bear Stearns, complicated by news of an inquiry into trading on market before the bank went to the Fed for help late last week.

Media reports today suggested that the US Securities and Exchange Commission and the New York Stock Exchange were probing trading in Bear Stearns shares in the lead up to the approach to the Fed to see if there was any deliberate undermining of the bank by hedge funds or other speculators.

Unnamed market sources have claimed this happened, but others say the speculation has come from Bear Stearns shareholders who have been badly damaged financially by the bank’s crash and the $US2 a share deal with JP Morgan.

Bear Stearns shares traded up to $US8 overnight in the wake of the better than expected quarterly results from Lehman Bros and Goldman Sachs (both reported sharp drops in profits and write-downs but no disasters). Punters piled in expecting a higher offer, while traders said some investors were actually shorting the shares in the expectation there would be no other bids.

For another bid to succeed the Fed would have to give its approval and it has already thrown its lot in with JP Morgan who also has the balance sheet clout to handle the expected $US6 billion of transaction and other costs that it says it will incur. JP Morgan’s shares have risen, so it’s offer is now valued at around $US2.30 a share.

A mystery foreign exchange trader called Joe Lewis has so far lost well over $US800 million on the 9% stake he built in the company. And Bear Stearns chairman Jimmy Cayne’s stake is now worth around $22 million when a year ago it was valued at over $US1 billion. Several big US fund managers have also lost hundreds of millions in the bailout as the value of their holdings plunged.

In the case of Northern Rock, big hedge funds and some potential buyers tried to take on the Bank of England to force a better deal or easier terms. Will some private equity group or hedge fund emerge to try and hold the Fed to ransom, or will the SEC find something that could force the deal to be called off?

If any doubt emerges, watch the markets head south, very quickly.

Peter Fray

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