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April 15, 2008



You make some interesting assumptions:

1) The Fed prefers a takeover to continued operations (T-O-B). Why? Because a takeover benefits JP Morgan and the Fed’s interests are aligned with JP Morgan at the expense of Bear Stearns? I think you hit the nail on the head with “…more like politics, with coalition formation and strategic agenda control…”, but this seems like an odd stance for the Fed to take.

2) “If it chooses to lend, then Bear Stearns management gets to choose whether to try and keep operating or go into bankruptcy.” I don’t see how this is necessarily so. This presumes the Fed is unable to make lending conditional on Bear Stearns management making all efforts to avoid bankruptcy - which we can both agree would be their default preference (O-T-B).

3) “The lock-in provisions made bankruptcy less appealing and coerced the equity holders to settle.” Which equity holders have settled? As of today nothing has been voted on or finalized by shareholders.

Based on the shares consistently trading above the offer price it seems as though there won’t be a settlement. And maybe this is, in the end, exactly what the Fed wanted. Back to my first point – it seems the Fed actually wanted O-T-B and this is a very convoluted way of getting it. The elaborate methods employed were necessary to buy Bear Stearns some time – and time is all that was really needed to restore confidence in the company.

What the actual deals are (behind closed doors) and how all the public deals get cancelled out in order to return to normal will be interesting to see.

A very interesting case study indeed!

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