jck at Alea, the first to hint that Bear Stearns might be the victim of a bear raid, now reports that the SEC is on the case, investigating whether the liquidity crisis that brought down Bear Stearns was the product of an orchestrated whisper campaign.

That struck me as ironic, in light of Felix Salmon's digging into why Bear Stearns stock is trading at roughly triple what it will be worth if the merger with J.P. Morgan goes through. He points to David Neubert. Neubert heard 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.

These buyers, obviously, will vote their shares in favor of the merger with J.P. Morgan.

Let's speculate a bit.

Who else might want to see the deal go through? A firm called J.P. Morgan saw its market cap increase by more than 10 billion on speculation that the deal would go off as announced. Perhaps buying millions of shares at even $4, or $8 dollars, a share to ensure that it did would be in that firm's interest. If JPM paid $8 for every share of Bear, that would represent only a small fraction of the value the market ascribed to the merger, and a small fraction of the book value of the assets JPM stands to acquire.

Putting it all together, what's happened over the past week? A mysterious, still unexplained, loss of confidence led to a run on Bear, bringing the firm to the brink of bankruptcy. Rather than providing liquidity sufficient to see the firm through the panic (as expected Friday), Bear management, the Fed, and J.P. Morgan effectively ratified those rumors, by placing a value of $2 per share on Bear equity. No information was released to the public that would reconcile so low a valuation for Bear with the valuation of similar financial firms, especially with much of the Bear's risk offloaded to the Fed.

Despite the palpable anger of Bear shareholders, Morgan execs asserted their confidence that eventually owners of Bear stock would see the light and approve the deal. With a share price anchored around $2 rather than Friday's close of $30, sudden demand appeared for Bear equity. Today's trading volume was more than BSC's entire float, and 9 times the firm's average daily volume. Perhaps Morgan execs anticipated the possibility that there would be new shareholders with a deeper appreciation of the virtues of the merger?

If the SEC is out to find people who hoped to gain by spreading information that would tank Bear's share price so that they and their allies could gain control of firm assets on the cheap, the front page of the Wall Street Journal might be a good place to start.

I'm not alleging that anything illegal here — a deal was inked, that was news, not rumor. It may well be that the deal was wise and necessary and for the greater good, and it'd be hard to prove that it was worse for shareholders than the alternative of bankruptcy. Besides, everyone knows this smells funny, that's why J.P. Morgan is reserving $6 billion for "transaction-related costs", first bullet point: litigation.

The Bear Stearns crisis might or might not have been brought on by a bear raid against the firm. But the cure sure resembles one. As Paul Krugman put it, hair of the dog.