Monday, March 17, 2008

97% of Bear is crammed

Who will get crammed down? That is going to be the question of the next couple of years as promises go unfulfilled. And right now things are set up so that the decision makers who benefitted from secular uptrends are insulated from being stupid or from secular down trends.

John Quiggin at Crooked Timber is looking at the JPMorgan buy-out of Bear Stearns and notes that the Bear Stearns business model as of last night was worth a couple of billion dollars of negative value after one accounts for the value of the Federal Reserve backstopping all of the Tier III, Mark to Fantasy assets and their probable attendant write-downs. One would imagine that creating negative value is a BAD THING and not to be rewarded.

However JP Morgan disagrees, as this Reuters report shows that one of the larger merger costs will be paying off some Bear Stearns employees for either retention or retirement purposes. These bonuses will only apply to top level individuals and not to the vast majority of people who were not in a position to screw up royally and create negative value:

taking over Bear would generate about $6 billion in merger-related costs.

JPMorgan has not broken down those figures, but much of that will be earmarked for severance pay and potential exit packages for top executives like Schwartz.
A person familiar with the transaction told Reuters that roughly $1 billion of those costs would be earmarked for severance and retention.

Screw-up, destroy a business and need a massive bail-out and become eligibile for a billion dollar bonus pool. Do a good job, work your tail off, buy into the company and not destroy the business, and you are screwed over.

Do we have an incentive problem here? I think so....

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