this is really huge news...

J.P. Morgan Rescues Bear Stearns
U.S. Pushed Deal
To Avert Crisis;
A Fire-Sale Price
By DENNIS K. BERMAN, SUSANNE CRAIG and KATE KELLY
March 17, 2008

Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.

The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies' boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday's close, Bear Stearns's stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.

Effective immediately, J.P. Morgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. The deal isn't subject to any conditions, except shareholder approval. It is expected to close before the end of the second quarter.

Government regulators, including the Federal Reserve and the Office of the Comptroller of the Currency, have given their blessing to the transaction

Many well-known investors, from billionaire Joe Lewis to Bruce Sherman, the head of Legg Mason Inc.'s Private Capital Management Inc. money-management firm, have seen the value of their stakes in Bear Stearns plummet. The pain could be most acute for Bear Stearns's employees, who are steeped in a culture of personal ownership -- and hold about a third of the firm's shares outstanding.

Through the weekend, Bear Stearns bankers were summoned to the company's headquarters on New York's Madison Avenue, where they were told to prepare lists of ongoing deals and business relationships. Representatives from prospective buyers circulated through conference rooms, with J.P. Morgan executives asking questions of Bear Stearns's senior management. A separate bidding group, including J.C. Flowers & Co. and Kohlberg Kravis Roberts & Co., also was in the mix, said a person familiar with the discussions.

Bear Stearns shares, which traded as high as $170 in January 2007, fell 47% on Friday after the firm was forced to seek emergency funding from the Federal Reserve and J.P. Morgan to stay afloat amid a severe cash crunch.

One stumbling point for a sale appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan was eager to snap up some of Bear Stearns assets -- such as its prime brokerage business that caters to hedge funds -- Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm's exposure, said people familiar with the matter. Spokesmen for Mr. Dimon couldn't be reached yesterday.

Despite the emergency funding from J.P. Morgan and the Federal Reserve that was announced Friday and gives Bear access to cash for an initial period of 28 days, the clock is ticking on the 85-year-old firm. Late Friday, credit-ratings firms downgraded Bear Stearns to two or three levels above junk status. The downgrades also had a big impact on Bear Stearns's viability, as they severely crimped the firm's number of potential trading partners.

Regulators, bankers and investors are concerned Bear Stearns's stock could plummet even further when the stock market opens today. A continued exodus by parties with which the investment bank trades could even cause it to collapse. Still, unwinding Bear Stearns could be a nightmare because of the plethora of Wall Street firms with which it has dealings.

Analysts and investors are bracing for more bad news as securities firms report earnings this week, though Bear Stearns's results are expected to surpass the average estimate from analysts surveyed by Thomson Financial, say people familiar with the matter. A Bear spokesman declined to comment.

Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns's troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.

Investors' concerns that the flight of worried Bear Stearns customers last week might spread to other firms is likely to make for a tense opening today on Wall Street. Yesterday, Mr. Paulson said in a TV interview that the government "would do what it takes" to protect the integrity of the financial system.

On several occasions over the weekend, Mr. Paulson spoke about the Bear Stearns negotiations with Federal Reserve Chairman Ben Bernanke and New York Federal Reserve Bank President Timothy Geithner, according to people familiar with the matter.

The takeover agreement signals an abrupt and crushing end for Bear Stearns, one of Wall Street's best-known firms. Though it had survived many previous market swoons, it was savaged by the crisis in the nation's mortgage market, which began last August.

Over the weekend, some Bear Stearns employees were hoping a foreign bank would emerge as the winning suitor, since that might mean fewer job cuts than in a domestic acquisition. But those prospects dwindled, leaving J.P. Morgan in the prime position to acquire the firm.

For J.P. Morgan, a Bear Stearns deal essentially would be one of convenience. The big New York bank hadn't planned on buying a Wall Street firm. It was focusing instead on the prospect of buying a large regional bank. But people familiar with the matter said that the Bear acquisition doesn't preclude J.P. Morgan from pursuing that strategy.

One of Bear's biggest attractions for J.P. Morgan is its prime brokerage business which caters to hedge fund clients. J.P. Morgan doesn't have such a business and executives there have long said that they would like to add those operations to the bank's portfolio. J.P. Morgan has been one of the banks eyeing the prime brokerage business of Bank of America Corp. That business reportedly is on the auction block.

J.P. Morgan executives, however, are far less interested in the rest of Bear's operations, including its investment-banking unit. J.P. Morgan already has a substantial investment-banking operation with ties to many high-profile clients. Indeed, executives have scoffed at the idea that J.P. Morgan would buy a large Wall Street firm despite repeated speculation that the bank would ultimately buy a rival such as Morgan Stanley.

"Fill-ins, piecemeals, joint ventures, small purchases, where they're filling gaps, [we are] absolutely, always open, always interested. But on doing something major that would create a dramatically different landscape, not in my lifetime," Steve Black, co-head of J.P. Morgan's investment bank, said last year.

Over time, Bear Stearns's misfortune could bear fruit for J.P. Morgan. Bear Stearns's investment-banking unit, which underwrites stocks and bonds and advises on mergers, and its fixed-income and capital-markets trading businesses have been badly bruised by the credit crunch but still have some value.

Likely even more valuable are Bear Stearns's clearing unit, which settles trades and also services and lends to hedge funds, and an investment-advisory business catering to wealthy customers. Both of those operations have suffered from withdrawals in recent days.

The probable sale of Bear Stearns is the latest in the cascading mortgage-related blows that began last summer and have resulted in staggering losses and write-downs on Wall Street, the ouster of several high-profile CEOs and an epidemic of worry that the financial system faces even more turmoil.

On Friday, Bear Stearns sought and received emergency funding backed by the federal government. Both the Fed and J.P Morgan stepped in to keep Bear afloat as investors moved to pull assets out of the firm. In stepping in, the Fed was trying to move aggressively to prevent the firm's from spreading to the broader economy. The lifeline gave Bear access to cash for an initial period of 28 days -- but it was widely believed Bear would be sold within days to keep it from going under.

The Fed's unusual intervention was motivated by a concern that a rapid and disorderly failure of Bear Stearns would wreak havoc on the markets in which the firm is an intermediary, particularly the huge and important securities-repurchase, or "repo" market.

Bear Stearns risked defaulting on extensive "repo" loans, on which firms pledge securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would find their access to repo loans restricted. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices.

As a result, one of regulators' priorities in any deal for Bear Stearns or its parts is to minimize the risk to the financial system. That suggests that they want those counterparties furthest removed from Bear Stearns itself to know immediately where they stand in any deal, and for a buyer to have sufficient financial strength to reassure those counterparties.

Bankruptcy experts said filing for bankruptcy protection wouldn't have been an attractive option for Bear Stearns, partly due to recent changes in the federal Bankruptcy Code relating to financial instruments like derivatives and repurchasing trades. Unlike most parties in bankruptcy, lenders in such transactions aren't stayed or prevented from acting to seize or control the assets involved in those deals.

"They can send you a letter saying the value of the assets is falling, so either pay us back or we will liquidate the asset," said Holly Etlin, a managing director at AlixPartners, a turnaround and business advisory firm.

Financial regulators, which had been monitoring the situation at Bear on a daily basis leading up to Friday, beefed up their presence inside the firm over the weekend. Staff from the Securities and Exchange Commission's examinations group and trading and markets division, which monitors capital levels for soundness, worked with representatives from Wall Street's self-regulator, the Financial Industry Regulatory Authority, and Federal Reserve.

The SEC and Finra staff inspected Bear's books to ensure that if customers began pulling their accounts that there was a process to unwind the positions fairly, so as to prevent additional losses.

The regulators also had staff at other firms to monitor the brokerage firm's capital level amid speculation it could face liquidity problems. A person familiar with regulators said their presence wasn't to suggest that any particular firm was in trouble, rather it was to examine whether there was enough cash on hand to deal with potential problems.

The craziest part about it is, it was trading at $90+ in February, and started March at almost $80. I pity the fools who bought it then, or even on Friday at $30.

the $2 purchase price is a joke...its basically saying equity worthless and we think the assets on the balance sheet are worth more than the liabilities so we'll assume it and gaurantee it.

i mean book value is $80 a share. they paid $2. that means they think the assets are some 8 billion overstated (out of 300b)

So, JP Morgan is now seizing control of even more assets... Am I reading this correctly?

JP Morgan bought Bear Stearns, and as part of the deal, the government is guaranteeing up to $30b of mortgages and other assets.

Well, that sounds like quite a deal... Buy out a bank at fire sale price, and get $30b of mortgages guaranteed while you're at it...

This sounds important, but I don't understand economics.

Since we don't really have another financial thread, I'll post this here, since its related. More about the Fed's role in all of this.

http://online.wsj.com/article/SB120571194513840285.html?mod=special_coverage

Central Bank
Offers Loans
To Brokers,
Cuts Key Rate
Historic Steps
By GREG IP
March 17, 2008; Page A1

The Federal Reserve announced one of the broadest expansions of its lending authority since the 1930s in an effort to stem a credit crisis that is engulfing the financial system and threatening a deep recession.

For the first time securities dealers, effective today and for at least the next six months, may borrow from the Fed on much the same terms as banks. The Fed also lowered the rate charged on such borrowings from what's known as its discount window by a quarter of a percentage point, to 3.25%, and extended the maximum term to 90 days from 30.

"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve Chairman Ben Bernanke said in announcing the emergency initiatives yesterday evening.

Early trading in Asia suggested additional steps might be needed to calm markets. In Tokyo the Nikkei 225 Average fell 4.2% to its lowest level since August 2005. Hong Kong's Hang Seng index dropped 4.7% in the first 15 minutes of trading, while the Shanghai Composite fell 1.9%.

Meanwhile, the U.S. dollar sank against the Japanese yen on expectations the situation may reflect a greater tolerance of inflation by the Fed. The Fed is expected to follow up tomorrow with a cut in the federal-funds rate, charged on overnight loans between banks, of a half to a full percentage point from its current 3%. (See related article.)

The steps were announced at the same time the Fed agreed to lend $30 billion to J.P. Morgan Chase & Co. to complete its acquisition of Bear Stearns & Co. The loans will be secured solely by difficult-to-value assets inherited from Bear Stearns. If the assets decline in value, the Fed -- and thus, the U.S. taxpayer -- will bear the cost.

The historic nature of the steps the Fed has taken reflects what the central bank sees as the unprecedented scale of the storm now sweeping through the markets and the economy. Starting with rising defaults on subprime mortgages a year ago, the crisis now has caused investors to question the ability of once rock-solid firms to repay loans.

That has triggered a massive deleveraging. Investors, banks and others are hoarding cash, pulling in their loans and trying to reduce their own exposure to risky markets. That has sent yields on risky securities such as mortgage-backed bonds up, dealing the housing market and the economy a fresh blow and leaving the Fed seemingly powerless to restore a willingness to lend by cutting interest rates, its traditional tool.

In some ways, the initiatives better equip the Fed to help a financial system that has changed drastically from one based on banks for most of its 95-year existence. It took a unanimous vote by the Fed's five governors yesterday to invoke a Depression-era clause in the Federal Reserve Act to waive the usual prohibition on Fed loans to nonbanks. A Fed official told reporters today's circumstances couldn't have been envisioned when the Fed was created, and noted newer central banks like Europe's have many of these powers. But these steps also take the central bank into uncharted territory with new and potentially troublesome risks.

Those risks include the possibility that with the credit crunch showing no sign of lifting, the Fed will be called on to lend to other troubled firms and end up a major creditor of Wall Street, even if at present the risk of any substantial loss appears small. Another risk is that while the Fed used a loophole yesterday in the Federal Reserve Act to expand its lending to nonbanks in "unusual and exigent" circumstances, it has in effect expanded the federal safety net with no political debate. However, the Fed sought and received agreement over the $30 billion loan from Treasury Secretary Henry Paulson, who informed President Bush.

Bigger Test

For now, though, the bigger test will be how the markets greet the initiatives today: with relief at the bold steps taken to shore up the financial system, or with alarm at how unstable the financial system had to be to invite such action.

Officials appear to hope the initiatives will restore enough confidence to markets to allow a smaller rather than larger rate cut tomorrow, but they acknowledge it will depend partly on how markets evolve over coming days.

On Wall Street, there is likely to be some relief that the Fed has finally opened the discount window to securities dealers, something they have long clamored for. The Fed has been reluctant because the move was outside its explicit mandate. "This is a five-vodka event," said a senior executive at one big brokerage firm that previously didn't have access to this funding source. "Liquidity is no longer an issue."

Federal Reserve Bank of New York President Timothy Geithner told reporters: "This is designed to help get liquidity to where it can help play an appropriate role in helping address the range of challenges" in the markets, especially in the mortgage-backed securities market.

Mr. Paulson said in a statement, "I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets."

For all their creativity, the Fed moves are also an acknowledgment that its previous steps have failed to stem the collapse in investor confidence, forcing it to abandon many of its original principles, such as not favoring particular firms or market sectors and sticking within its explicit statutory authority.

Last Tuesday, it announced what Wall Street called its most creative initiative yet: It lent up to $200 billion of its much-sought Treasurys to investment banks starting March 27 in return for a like amount of now-shunned mortgage backed securities for up to 28 days. The announcement led to a huge rally in stocks. But within days dealers were telling the Fed it didn't go far enough. They wanted longer term, more immediate funding against a broader range of collateral.

It also came too late to save Bear Stearns. On Thursday evening, Bear Stearns informed the Securities and Exchange Commission and Fed that it had experienced a dramatic loss of cash reserves and now saw no option other than to file for bankruptcy protection Friday morning. Fed officials at that point saw just two options. They could try to wall off the rest of the financial system. If the environment had been less tumultuous they might have chosen that option.

But in the current period they feared that a failure by Bear to make good on billions of dollars of contracts could severely dislocate critical markets, especially garden-variety repo loans -- overnight loans secured by various collateral that are the grease of the credit markets.

Too Interconnected

Officials grimly concluded that while Bear Stearns wasn't too big to fail, it was too interconnected to be allowed to fail in just one day. They spent Thursday night going over Bear's books and huddling with the SEC and Treasury. By Friday morning it had settled on its second option: a 28-day secured loan via J.P. Morgan to give time for a sale or wind up of the firm.

Over the weekend officials led by Mr. Geithner and Mr. Paulson and assisted by Fed governor Kevin Warsh, a former investment banker, and joined by Mr. Bernanke and Fed Vice Chairman Donald Kohn in Washington, worked to hammer out a deal. The Fed's priorities were to limit the spread of fear to the rest of the financial system, especially the repo market. That meant it wanted a deal done before markets opened Monday.

To reassure the markets and Bear Stearns's counterparties, Fed officials wanted the investment bank's buyer to be able to announce at the same time as the purchase that it would stand behind all of Bear's agreements in the repo, derivative and securities lending markets. Also to reassure those counterparties, the buyer had to be of unquestioned financial strength. All those priorities meant a deal for the whole firm was far preferable to a deal for just the pieces and the uncertainty that could create.

--Michael M. Phillips and Susanne Craig contributed to this article.

Write to Greg Ip at greg.ip@wsj.com

The $2 basically represents the assets of the company that JPM actually wanted. Had they just bought those and left the rest of the company to go bankrupt, who knows what would happen to the rest of the banks.

Just read an interesting blog entry:

http://ronsen.blogspot.com/2008/03/bury ... at-is.html

This is insane

Fun fact: in 2006 Bear Stearns gave out $2.3 BILLION in bonuses to executives. That's 10 times the price the firm was sold for today.

this is actually unfair. wall street routinely pays ~50% of revenues in salaries to all employees. that is probably the statistic you are reading. the did not pay out 2.3 billion to the top 5 or 10 employees. the top 10 people probably made 20-50 million each. nothing to sneeze at but not 2.3 billion.

investment banks consist of computers, desks, and people. the assets walk out the door every day. all the good people at bear will be absorbed by jp morgan or another bank.

You're right. I shouldn't have limited it to "executives". It was total bonuses.

But I'll bet that the executives accounted for a good half of that figure. $30 million bonuses are not unusual among this class.

again, this is standard all over wall street. now if you want to start a thread titled "wall street is stealing all of america's money" i wouldnt be against it and i work on wall street.

The point of my post was that the bonuses just over a year ago were 10 times the price paid for the entire company yesterday. If they were equal numbers, THAT would have been shocking enough.

this is true but more stats:

employees (who got those bonuses) own 30% of the company...so whether they pay it to themselves as a dividend or as salary...

any company that essentially goes bankrupt means that the equity was sold for "0". you can do this in any scenerio. in the height of enron's day im sure salaries and bonuses of the staff were in the billions when the equity ended up being worth nothing. also, anytime an airline goes bankrupt...salaries and bonuses were in the billions the years leading up to the bankruptcy.

the $2 is a very arbitrary number here. the stock is now trading at $7. what is relevant is the massive balance sheet jpm acquired and what its true worth is. bear's book value was $80. thats the theoretical value if they wound the whole firm down (excluding costs to do so) how much would be left over for shareholders. JPM thinks its worth $2, not $80. Clearly its somewhere in the middle. BUT, had JPM not stepped up with the fed on sunday Bear would have filed for chap 11 on Monday. Clients are fleeing left and right. We arent trading with Bear and all of their prime broker clients (institutions who park their securities there) are still pulling their money and business.

In the end, Bear won't have much of a business left if this doesnt get resolved soon. and its not resolved yet...with the stock at $7, sharehodlers are signaling they will vote this down...creating even more uncertainty for bear and bear clients.

why is stephen colbert looking at me...was that over your head?