The Deal of a Lifetime
Wednesday, March 19th, 2008
By Michael Lombardi, MBA for Profit Confidential
I’m all for the Federal Reserve coming to the aid of the economy by reducing interest rates and expanding the money supply; but by saving ailing brokerage The Bear Stearns Companies, Inc. (NYSE/BSC), I believe the Fed went too far.
The United States is a free market system, and when the government intervenes in that capitalistic based society, inequalities are created.
Last week, the Fed came to the rescue of Bear Stearns by back stopping a loan that JPMorgan Chase & Co. (NYSE/JPM) made to Bear Stearns. “Back stopping” basically means that if JPMorgan loses the money it lends to Bear Stearns, the Fed will cover Morgan’s loss so Morgan is not out of pocket.
Two days ago, we learned that JPMorgan is now buying Bear Stearns for the ridiculously low price of two hundred and thirty-six million dollars, which equates to less than half of the market value of its New York headquarters located on Madison Avenue. JPMorgan’s market valued skyrocketed by $12.0 billion in one single session on the news because the market knew that JPMorgan got a great deal. Meanwhile, billions of dollars were wiped out in Bear Stearns’ value. It was the deal of a lifetime for JPMorgan. If only old Pierpont himself was around to see this one.
Would JPMorgan have gotten this good of a deal if the Fed had not interfered? I don’t believe so. With this deal, JPMorgan acquires a prime U.S. broker with 14,000 employees. The JPMorgan deal was completely unfair to the shareholders of Bear Stearns, whose stock traded as high as $50.00 in 2007. JPMorgan is proposing to buy the company for $2.00 a share. The public be damned again — and this is why I don’t like the Fed interfering in a free market system.
The Federal Reserve should stick to what it does best and let Wall Street pay for its own mistakes. And doing what it does best is exactly what the Fed did yesterday when it lowered its key federal funds rate by three-quarters of one percent to 2.25%.
Interest rates have been cut by the Fed six times since last summer. So far this year, the Fed has reduced interest rates by two full percentage points.
I believe that Ben Bernanke is doing a great job at cutting interest rates to spur the economy. And the stock market loves it. As the Fed slashed interest rates yesterday, the stock market had its biggest rally in five years.
As I wrote in my column on Monday, the stock market says that the economy is not as bad as it seems. If you were the stock market, wouldn’t you be thinking that no matter how bad it gets, no matter if a major U.S. stock brokerage is going bankrupt, the Fed will bail everyone out? Well, that is exactly what has happened so far. Have no fear, the Fed is here.
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Tags: Ben Bernanke, interest rates, stock market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
