A New Deal for JPMorgan Chase and Bear Stearns

In a turn of events that sweetens the deal for Bear Stearns shareholders, JPMorgan Chase has changed the terms under which it is acquiring Bear Stearns. In an emergency deal announced Sunday March 16, JPMorgan Chase, with $30 billion in financial backing from the Federal Reserve Bank of New York, said it would take over Bear Stearns in a stock swap worth about $2 per Bear Stearns share. All week, shares of Bear Stearns have been trading substantially higher than that, prompting questions of a white knight taking over Bear Stearns at a higher price.

The new deal, announced March 24, has JPMorgan Chase buying Bear Stearns in a stock swap worth about $10 per share, and JPMorgan Chase will also buy “5 million newly issued shares of Bear Stearns common stock, or 39.5% of the outstanding Bear Stearns common stock,” after the issuance of the new shares, and closing that part of the deal “on or about April 8,” according to the JPMorgan Chase/Bear Stearns announcement.

JPMorgan Chase will bear more risk in this new deal and the Federal Reserve Bank of New York will bear slightly less: JPMorgan Chase “will bear the first $1 billion of any losses associated with the Bear Stearns assets being financed,” and The Federal Reserve Bank of New York “will fund the remaining $29 billion on a non-recourse basis to JPMorgan Chase,” meaning that JPMorgan won’t be held liable for any losses on The Fed’s $29 billion part of the funding.

“The JPMorgan Chase guaranty of Bear Stearns’ trading obligations has also been significantly clarified and expanded. For more information, the guaranty agreement will be filed publicly and the parties will provide a Question and Answer document describing the guaranty in further detail on their respective websites. JPMorgan Chase has also agreed to guarantee Bear Stearns’ borrowings from the Federal Reserve Bank of New York,” according to the announcement.