http://dailybriefing.blogs.fortune.cnn.com/2008/03/18/why-bear-stearns-stock-is-in-orbit/ Daily Briefing By Colin Barr March 18, 2008, 11:42 am Why Bear Stearns stock is in orbit Why is Bear Stearns (BSC) up nearly 70% Tuesday, to a price about $6 a share above its $2-a-share buyout agreement with JPMorgan Chase (JPM)? Two groups are piling into the companyâs stock so they can vote in favor of the deal, a trading source tells Fortuneâs Roddy Boyd. The first group is the hedge funds that were selling so-called credit default swaps that protect the purchaser against a possible bankruptcy at Bear Stearns. Spreads on Bear Stearns CDS soared to 1,000 basis points Friday - meaning it cost $1 million to insure against a default of $10 million face value of bonds. Those spreads have since narrowed to around 350 basis points, or $350,000 per $10 million in insurance, in light of the prospect that JPMorgan Chase will take over Bearâs obligations. So a seller of a Bear Stearns credit default swap on Friday, having taken in $1 million in premium, can now turn around and protect himself against a default in Bear Stearns for $350,000. That translates into a $650,000 gain -and the potential profit stands to get bigger as the close of the transaction approaches and Bear spreads move more in line with JPMorganâs, which are around 115. Those dynamics give hedge funds a big incentive to make sure the deal goes through. Beyond the credit default swap trade, thereâs another group interested in making sure JPMorgan winds up owning Bear Stearns. Holders of Bear Stearns debt want the deal to go through so they wonât end up fighting with other creditors in bankruptcy court over the remains of the firm - the likely outcome if Bear shareholders turn the deal down. And Bear Stearns bonds that recently traded as low as 80 cents on the dollar could soon be worth 100 cents if JPMorgan goes through with its purchase. So while taking a loss on the stock makes little sense on the face of it, buying at $7 to get cashed out at $2 can pay off if youâve bet enough money elsewhere. http://seekingalpha.com/article/69107-why-is-bear-stearns-trading-above-deal-price?source=wildcard Why Is Bear Stearns Trading Above Deal Price? posted on: March 18, 2008 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) is trading so far above the deal price with JP Morgan (JPM) 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 Diamond 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) 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 on 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.