No Tears for Mr. Cayne

Poor Mr. Cayne. The $2 a share deal negotiated last week with the approval of the U.S. government, reducing his stake in the firm to a value of $14 million, wasn't good enough. This week J.P. Morgan Chase (JPM) boosted its offer fivefold, to $10 a share, to make Cayne and other large shareholders feel better.

In my view, Cayne and other Bear Stearns shareholders were lucky to get $2. I, too, feel bad for the rank-and-file at Bear Stearns who had no control over the firm's risk policies or balance sheet. But I feel worse for plenty of financially-strapped Americans. They won't be buying Central Park views with a taxpayer-financed windfall.

I don't doubt that Bear Stearns is worth more today than it was a week ago. It may be worth even more next week. Asset values change over time; that's what risk is all about. It might be argued that J.P. Morgan doesn't deserve the deal the government orchestrated for it. But make no mistake: If the federal government hadn't guaranteed $30 billion of Bear Stearns's assets last week, and if J.P. Morgan hadn't pledged to honor its financial obligations, Bear Stearns would be bankrupt now. Its assets would be liquidated under fire-sale conditions, further depleted by lawyers' fees and other expenses. The financial system might well be in turmoil. Could Bear Stearns shareholders hope to get more than $2 a share under those circumstances? I doubt it.

We can't turn the clock back to March 16, when the original deal was announced. Any subsequent improvement in Bear's asset value should accrue to the people who made it possible, namely the taxpayers, and to a lesser extent J.P. Morgan, which took the risk of stepping into the breach — not those who drove the firm to the brink.

When the government decided that Bear Stearns was too important to fail, and decided to intervene and force a merger, it essentially stripped Bear Stearns shareholders of an important privilege of ownership, which was to determine the firm's future. No wonder many were furious. This is a policy decision, made under difficult circumstances, that can and should be debated. But this was deemed the price that had to be paid to ensure the stability of the broader financial system, which is the Federal Reserve's mandate. It seems to have worked, at least so far. In return, Bear Stearns shareholders got something: $2 a share. Not much, perhaps, but better than anything else the firm's officers came up with. And shareholders remained free to tender their shares to anyone offering a better deal.

Instead of expressing their gratitude, the parties reneged. I find it galling that so many on Wall Street extol the virtues of risk taking when the returns run in their favor. The minute they turn against them, it's "unfair."

The howls from Bear Stearns shareholders were as predictable as they are self-serving. Why J.P. Morgan, a firm not otherwise known for its altruistic impulses, would raise its offer is more puzzling. Apparently it didn't like the terms of the deal that it and its high-priced lawyers negotiated, since Morgan had to guarantee Bear Stearns's obligations even if shareholders rejected the deal. Why this should be our problem, as opposed to Morgan shareholders', is beyond me. If Morgan genuinely feels the original deal was too generous, then the government should reduce its guarantee not by the measly $1 billion it agreed to, but by enough to make the deal worth $2 a share. Maybe it's not too late; $15 billion might be a start.

Bear Stearns shares were trading this week above $11 — more than 10% above the latest sweetened offer. Having already feasted once at this trough, who can blame the arbitragers (yet another class of people who hardly deserve a bailout) for feeding once again? I'm not and have never been a Bear Stearns shareholder, nor would I become one now. But I'm not surprised that some people believe the government is so spineless and so afraid of the deal's failure that it will cave yet again.

Having artfully solved a thorny problem a week ago, the government has now embraced a deal whose terms reek of the bailout it was at such pains to avoid. If the government is willing to bestow such a windfall on a James Cayne, where will it it stop? Why should other financial firms reduce risk and shore up their capital? What discipline will the market ever be able to impose? Future disasters will only be worse, which will dwarf the immediate cost of the current rescue.