Wednesday, March 19, 2008

Bear Investors bet that Moral Hazard Doesn't Exist for Them

by Ken Houghton

The Wall Street Journal has several articles today on the death of The Old Firm. Most interesting is "Heard on the Street" (link requires sub), where investors appear to have decided to play a game of Chicken with both Jamie Dimon and the Federal Reserve.

There will be a lot of noise about this over the next few months, and someone (not me) will get a nice dissertation out of the results.

Most interesting, though, from an asymmetrical information point of view, is this one, which notes that the inept Christopher Cox-led (but I repeat myself) SEC:
issued a written statement suggesting it has expanded an inquiry into Bear Stearns Cos. to include what was or wasn't said in the two months leading up to the brokerage firm's unraveling.

The SEC, which is usually mum about investigations, said its enforcement division wrote a letter as J.P. Morgan Chase & Co. was negotiating to take over Bear. The letter addressed to J.P. Morgan concerned "investigations and potential future inquiries into conduct and statements by Bear Stearns before the public announcement of the transaction with J.P. Morgan."

The Bear speculators are treating the stock as if it were SCO, which for a few years was basically a gamble on a successful lawsuit. That effort has not been pretty.

Strangely, their greatest hope may also be their greatest weakness, renowned bridge player and former CEO Jimmy Cayne. As the New York Post notes:
Cayne, who is a member of Bear's board of directors and voted for the JPMorgan deal, could risk further embarrassment if he threatens to vote against the deal, sources said.

The "I was for it before I was against it" strategy is not something I want to gamble $4/share on. Your taste for lawsuits may vary—just be certain they are suits in your favor, not against you.

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