We know why the US Federal Reserve had to rescue Bear Stearns: it had run out of money and had an estimated $US10 trillion in various forms of credit and other derivatives and assets which was said to threatening the world as we know it.

But did it have to rollover when the very people who were supposed to be losers — the shareholders and executive at Bear Stearns — objected to the initial $US2 a share offer from JP Morgan and forced it to be upped to $US10 a share?

Bear Stearns’ big shareholders, including British billionaire Joe Lewis, moaned that they had been taken to the cleaners by the $US2 a share offer, which they had, as had the 14,000 employees who collectively owned around one third of the issued capital.

The original offer valued Bear at $US236 million; the $US10 a share an offer values it at $US2.1 billion. So Chairman Jimmy Cayne will get around $US70 million, instead of $US7.1 million, and the staff get around $US700 million, instead of $US78 million.

The Fed had been spreading the word that there was no bail out because the shareholders were taking a “big haircut”. Now it’s merely a light shave.

To make the deal stick this time Bear Stearns directors have issued JP Morgan with 39.5% of the company in new shares, which obviates the need for a shareholder meeting which could have turned ugly, and the Bear board will recommend the deal.

You might ask why the Fed didn’t insist on those conditions being in place for the $US2 a share offer. Things looked so grim that they would easily have been agreed to. Now the Fed and JP Morgan look as tough as a pair of Tickle Me Elmo dolls.

The Fed has insisted that JP Morgan wear the first $US1 billion in losses and put aside $US6 billion to cover the merger and other costs, but that’s going to be an effective subsidy from taxpayers: JP Morgan gets to write those costs off earnings. If Bear Stearns is as profitable as everyone insists it still is, JP Morgan could have tax free earnings from its new acquisition for years to come, if it structures the transaction properly.

The Fed takes control of $US30 billion of Bear Stearns least saleable assets and finances it with $US29 billion of public money in a company to be administered by another Wall Street firm called Blackrock, which bought Merrill Lynch’s funds management arm a year ago and is still 49% owned by the tottering Merrill.

So it was no wonder the Dow was up 187 points and US 10 year bond rates rose by nearly 0.25% to finish at 3.54% in the wake of the new deal and some interesting figures on sales of existing homes. Those sales were up 2.6%, but the median house price plunged 8.6% year on year to just under $US196,000, the biggest fall in 40 years.

Wall Street now knows that whatever happens, shareholders and high flyers in investment banks will be looked after. And the new deal makes a mockery of the line being pushed by The Economist, which claimed the “fate of Bear Stearns shows that when things go wrong, punishment can be severe”.