The most dramatic event in the wild and woolly month of March 2008 was the shocking, Fed-inspired bail-out of Bear Stearns by JPMorgan. If one believed the press clippings, Bear went from being a perfectly fine firm to one that needed emergency funding to stay afloat in a mere four days. The end result was an 80-year old institution that was bought by one of the best-run banks on the Street for a mere $2 a share.
After the deal was announced on the 24th, Bear Stock immediately dropped to $2, but bounced thereafter, eventually settling around $5 per share–more than double the buyout price–prompting numerous observers to ponder who could be so bullish on a firm that had fallen so much in such a short period of time. (For a further update go here.)
Obviously, some were betting on a sweeter deal from JP, and they ended up being right on the money. But for a vast majority of Bear Stearns equity buyers, other economic incentives were at play.
In fact, the real driver of Bear's stock price was bond buyers. Having purchased debentures at 60 cents on the dollar, news of the JPMorgan deal drove bond prices near par on the 24th. The way bond buyers gamed it, if the Morgan deal somehow went bust, Bear would almost certainly go to a higher bidder. In that case, what is good for the shareholders is bad for the bondholders, as a busted deal would all but eliminate the profits the latter group were sitting on. As a result, bondholders had no choice but to buy Bear stock to diversify their risks.
