I've been getting the inside scoop from some hedgefund traders (who always request to remain anonymous). One told me that the reason Bear Stearns (BSC - $7.90) is trading so far above the deal price with JP Morgan (JPM - $41.00) is that bond holders who NEED the deal to go through are buying millions in equity to save their billions in debt. The will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt. Also, the equity acts as a nice hedge. If the deal does not go through, Bear Stearns equity will go up a lot and the bonds will go down.
JP Morgan's Jamie Dimon is extracting his pound of flesh from taxpayers (no one represents them) and equity holders in order to guarantee the debt of Bear Stearns.
Lesson in hedge fund thinking:
Equity up? The bank is being sold cheap at the expense of equity holders to protect bondholders. No deal means the equity can trade up speculation that another buyer with more time to analyze the company will pay up.
Bonds Down? If JP Morgan walks away from its government subsidized guarantee, bonds fall.
In the meantime, I've been buying Bear Stearns Preferred stock (BSC-PrG $35.00) as my own way of collecting some of that free government bailout money being handed out to hedge funds and JP Morgan.
As I mention on ThePanelist.com, my favorite rant about the Bear Stearns giveaway can be found at Wall Street Weather. Felix Salmon asks a bunch more unanswered questions Bear Stearns on his MarketWatch Blog at Portfolio.com.
Disclosure: I own BSC (ouch). I am short a larger amount of 10 strike calls. I am long 15 strike calls. I own Bear Stearns Preferred Shares, BSC-PRG. I own JP Morgan (JPM). I am an unrepresented US Taxpayer.