[GocartMozart]

wow

this is the biggest market event in my memory if not since before I was born. Absolutely stunning.

JPMorgan to Buy Bear for $2 a Share: Financial News - Yahoo! Finance

JPMorgan to Buy Bear for $2 a Share

JPMorgan Says It Will Buy Ailing Bear Stearns, Former Wall Street Rival, for $2 a Share

NEW YORK (AP) -- With a deal finally struck, JPMorgan Chase & Co. will embark on the tough task of absorbing Bear Stearns Cos., once among its biggest rivals on Wall Street.

As the assimilation proceeds, the financial industry wants to know exactly how badly Bear Stearns bet on mortgage-backed investments. Unwinding the nation's fifth-biggest investment houses should provide some insight into what other financial institutions might have on their books.

JPMorgan's acquisition of Bear Stearns for the shockingly low price of $2 per share, or $236.2 million, occurred Sunday night, in a deal that was fast-tracked by the federal government to avoid a bankruptcy. A complete collapse of Bear Stearns might have completely crushed the already-dwindling confidence in the global financial system, which has frozen up after last year's collapse of the subprime mortgage market.

Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse.

The Federal Reserve and the U.S. government swiftly approved the all-stock buyout to complete the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.

"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we're probably heading into a recession."

JPMorgan said it will guarantee all business -- such as trading and investment banking -- until Bear Stearns' shareholders approve the deal, expected to be completed during the second quarter. The acquisition includes Bear Stearns' midtown Manhattan headquarters.

JPMorgan Chief Financial Officer Michael Cavanagh did not say what would happen to Bear Stearns' 14,000 employees worldwide, or whether the 85-year-old Bear Stearns name would live on after surviving the Great Depression and a slew of recessions. He told analysts and investors on a conference call that JPMorgan was most interested in buying Bear Stearns' prime brokerage business, which completes trades for big investors such as hedge funds.

At almost the same time as the deal for control of Bear Stearns was announced, the Federal Reserve said it approved a cut in its lending rate to banks to 3.25 percent from 3.50 percent and created another lending facility for big investment banks. The central bank's official meeting is Tuesday. Before the emergency move to lower the discount rate -- the rate at which banks lend each other money -- the Fed was widely expected to again cut its headline rate by as much as a full point to 2 percent.

Some analysts expected it to be a brutal day for global stocks. Shortly after the news broke, Japan's benchmark Nikkei stock index plunged more than 3 percent in morning trading.

JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago.

"The past week has been an incredibly difficult time for Bear Stearns," said Bear Stearns Chief Executive Alan Schwartz in a statement. "This represents the best outcome for all of our constituencies based upon the current circumstances."

Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world's largest investments banks -- it was a prop for the U.S. economy and the global financial system. An outright failure would cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.

After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government's guarantee that JPMorgan would not suffer any losses on the deal.

AP Business Writers Jeannine Aversa in Washington and Stephen Bernard contributed to this story.

[funkdoctorspock]

Quite stunning really. This is what happens in business when you put all your eggs in one basket.

Bear is quite lucky that the government saved them from going belly up.

No sympathy from me. Have to have more forsight than what Bear displayed.

[GocartMozart]

the thing with all of this is that the blame isn't just at bear, or at any single firm. this was a set of circumstances that all came to fruition because of faults with the entire system, the rating agencies, the insurers, the regulaters, the fed, the treasury department, Fannie and Freddie. There is so much blame that you don't where to start. The fact of it is that I don't blame bear stearns. They were trying to make money and had hedges in place, if the markets equate those hedges to nothing because the pricing mechanism is by defition whether a buyer and a seller can agree to a price, yet there are no buyers i.e. no liquidity, there isn't much you can do about that as a bank. how do you predict that the markets with create a situation where no confidence in counterparties.

this is a genie out of the bottle situation. derivative contracts will never disappear and are by their nature simply a contractual exchange of cash flows. it's a 560 trillion dollar market and by far the largest financial market on the planet. by their nature the two parties to the contracts must have faith in each others credit and ability to pay the agreed upon sums. If those assumptions are not applicable, ask the question "What is the price of this contract if no one wants to buy this contract?" The answer = zero. Bear may have been more leveraged than others and lacking the requisite liquidity to match such a catastrophe, but this is imo the largest banking crisis in the history of financial markets. the bailing out of the fed during the great the depression by the major banks is up there, but this is a significantly larger animal with global implications. In the end of the day I'm really not worried about how the markets will function a year from now since the markets are probably evolving or even going through puberty. The world has changed and the financial markets have to catch up and reassess their assumptions.

[funkdoctorspock]

Thanks for that post GCM. Extremely informative.

Here's the latest update on JPMorgan's chase to buyout Bear.

Brokerage quintuples offer to $10 a share and will purchase 39.5% of company to help ensure deal goes through

NEW YORK (CNNMoney.com) -- Seeking to calm angry shareholders and employees, JPMorgan Chase quintupled its offer for Bear Stearns Cos. to roughly $10 a share Monday.

The bank will also acquire 39.5% of Bear Stearns (BSC, Fortune 500) by scooping up 95 million newly issued shares to make it tough to derail the deal, according to a statement issued just after the U.S. stock markets opened. This part of the arrangement is scheduled to be completed around April 8. JPMorgan would only need another 10.5% of shareholder votes to close the merger.

Bear Stearns shareholders will now receive 0.21753 share of JPMorgan stock, up from 0.05473. Bear Stearns shares closed Monday at $11.25, up 88.8%, while JPMorgan (JPM, Fortune 500) shares were up 1.3% to $46.55.

The completion of the buyout was brought into question last week after some large Bear Stearns shareholders mobilized against the buyout. The deal, which was negotiated over three days at the prompting of the federal government and announced the evening of March 16, initially valued the troubled investment bank at $2 a share, a 93% discount from its closing price on March 14.

But shares traded above that all week in anticipation of another suitor making a higher bid.

Many Bear Stearns employees, who together own about a third of the company, were furious that their stakes would be virtually wiped out. Billionaire Joseph Lewis, whose holdings include 8.35% of Bear Stearns, said in a federal filing last week that his investment funds would "take whatever action that they deem necessary and appropriate to protect the value of their investment."

Executives at both firms defended the modified terms.

"We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," Jamie Dimon, JPMorgan Chase's chief executive, said in a statement.

"Our Board of Directors believes that the amended terms provide both significantly greater value to our shareholders, many of whom are Bear Stearns employees, and enhanced coverage and certainty for our customers, counterparties, and lenders," Alan Schwartz, Bear Stearns' chief executive, said in a statement.

"The substantial share issuance to JPMorgan Chase was a necessary condition to obtain the full set of amended terms, which, in turn, were essential to maintaining Bear Stearns' financial stability," he added.

The new arrangement will likely see the deal to completion, said Brad Hintz, senior analyst at Sanford C. Bernstein & Co. Opponents would have to try to contest JPMorgan's purchase of a 39.5% stake in court.

"The 39.5%, plus the support of the shares owned by the insiders sitting on the board, will make it difficult for a competing bidder," Hintz said.

Also, even at $10 a share, the agreement should not be viewed as a bailout since shareholders will still lose the bulk of their stakes, he said. Government officials have come under criticism for organizing a bailout of Bear Stearns, while doing less for the millions of Americans losing their homes to foreclosure.

In addition to the price, which now values Bear Stearns at a relatively paltry $1.4 billion not including the additional shares being issued, or $2.3 billion with them, other terms of the agreement were modified.

JPMorgan now will bear the risk of the first $1 billion of losses if Bear Stearns' assets go bad. The Federal Reserve Bank of New York will cover the risk for the remaining $29 billion, instead of being on the hook for all of the first $30 billion in losses, as was originally announced March 16.

To do this, the New York Fed will take control of $30 billion of Bear Stearns' assets through a newly formed limited liability company managed by BlackRock Financial Management. The assets would serve as collateral for $29 billion in financing from the New York Fed at a 2.5% rate.

JPMorgan Chase will be responsible for the first $1 billion of losses in the portfolio, while the New York Fed would keep any gains.

The Fed, with the support of the Treasury Department, is taking these steps "to bolster market liquidity and promote orderly market functioning," the central bank said in a statement.

By transferring responsibility for the first $1 billion in losses to JPMorgan, the Fed is minimizing both its risk and criticism that it created a "moral hazard" by giving the impression it will bail out failing firms, David Hendler, analyst with CreditSights, wrote in a report.

JPMorgan was first called March 14 to rescue Bear Stearns, which had suffered a classic run on the bank the day before.

Amid rumors questioning Bear Stearns' financial health, institutional customers started demanding their funds and asking the bank to put up more collateral to back its borrowings. Bear Stearns turned to the Fed, which asked JPMorgan to funnel funds to the embattled investment bank that the government would provide.

Two days later, with the government fearing that Bear Stearns' unraveling would send widespread panic through the financial markets, JPMorgan agreed to purchase Bear Stearns.

JPMorgan ups offer for Bear Stearns - Mar. 24, 2008