With Fed financing, JP Morgan buys Bear Stearns

I saw this headline and I thought it had to be a typo: "JP Morgan to buy Bear Stearns for $2/share."

It is not a typo, it is true, and it is a shocker, a bottom-dollar buyout that was brokered and backed by your government. Shares of Bear Stearns traded at $159  last April, and $57 on Thursday. Even after the investment bank effectively failed Friday morning and was bailed out by JP Morgan and the Fed, Wall Street's smart guys believed the company was worth $30 a share. Man, were they wrong.

The ultimate take-over price -- $236 million, or not even enough money to sign a decent baseball free-agent these days -- is stunningly low.  It means Bear Stearns was very close to worthless, a realization Wall Street did its best to avoid all day Friday.

It also means the financial fallout that began with the the crisis in the mortgage market -- yes, the same fallout the Bush administration repeatedly assured us was "contained" -- is not contained and is almost impossible to quantify at any given moment. You can safely say this: it is bad and getting worse.

Why a Sunday deal? The New York Times: "The talks between the companies, which were overseen by the Federal Reserve and the Treasury Department because of their potential effect on financial markets, were rushed in an effort to reach a deal before stock markets open in Asia at 8 p.m. Eastern time."

The bailout angle, from the AP: "The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Comments

[milt]

I was reading NY Times , 20 bucks a share.
Then received an e-mail update . Refreshed the page......... 2 bucks.
Imagine that, if I won the Mega Million lotto, i could have bought Bear Sterns

[SteveR]

I said it before, I'll say it again: DOW 5,000.

[SJ]

What a joke.

Bear Stearns is being bailed out.

Is this statement correct?? "The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets."

Why the hell are TAX PAYER dollars being used to bail out greedy banks???????

Bear Stearns bet the wrong way on mortgages and LOST. Let them fall. Perhaps a fiscally responsible lender can take their place.

Hey Fed, let the Free Market work. Let those who deserve to lose money, lose money.

That is the ONLY way they will learn their lesson next time.

No bailouts for irresponsible lenders and no bailouts for irresponsible borrowers.

[amir]

Goodbye bubble. Good morning price discovery.

Who's next?

[Michael Snyder]

I caught a part of Paulson's interview on Fox News this afternoon where he was discussing the reasoning for his actions regarding both Bear Sterns & subprime. When pressed about how taxpayer dollars were ultimately at risk in a failing market; his response was to say he wasn't going to predict the future and he spun off into another direction talking about how he would "do whatever it takes to insure stability in our financial system". Somehow passing the subprime infection into Treasury Bonds seems more like an act of desperation brought on by a bona fide fear of the inevitable results of the gross lack of over sight on the part of the SEC & Treasury Dept. for the past decade. It seems the only lessons learned out of the Lincoln Savings debacle were more creative methods to scam the system.

I have to say, any red neck worth his salt knows a lame duck act when he sees one & Paulson's not fooling anybody. Now that Bear Sterns has been picked up for four cents on the dollar, who's guaranteeing the repayment of the loans they got on Friday? Is the Fed going to "forgive" 96% of Bear Stern's debt now that JP Morgan owns it or will it work to maintain what little trust still remains in our financial system?

There was much to do about getting this deal done before the Asian markets open this evening. My bet is the savvy investor's won't buy it. We'll see that poor cat bouncing at least twice this week; tomorrow morning and again after the Fed's meeting where they'll reload Wall St's crack pipe. By the week's end 12,000 will be but a fond memory as the DJIA continues to prove Newton's laws of motion. I won't be shocked by oil at $120 and gold knocking on $1,100 as foreign currencies pummel the dollar. Meanwhile, back at the office; don't be looking foe an easing of credit as a result of these actions. As a part of that equal and opposite reaction, lenders will desperately look for greater margins as more and more risk is priced into the market. Instead of stopping the domino effect, the Fed & JP Morgan just kicked the legs out from under the table.

I know, I know. Bear Sterns is responsible for administering huge numbers of transactions every day and that alone is reason for some sort of a rescue. It's the Treasury's involvement that will spook the international market more than the failure of a single firm. Please note we still have airlines without TWA & Pan-Am. With the collapse of Carlyle last week and the precarious position of Thornburg, I'm looking for more failures as the market's paranoia spreads from subprime to Alt A financing.

In a well established human pattern, investors and government will look every where and blame everyone for their predicament but themselves. Yet if they had applied the common sense rules they learned in kindergarten we wouldn't be in this mess.

[Hardtaill]

Reminds me of that airline pilot a few years ago who rolled his passengers upside down tyring to improve his flight time. They fired him.

[jbunniii]

This is stunning news. Does anyone else think we're getting a taste of what 1929 felt like?

[tony]

And gold is up to 1,028 as I type, with no signs of slowing. Maybe Bernanke will get the message now regarding what the rest of the world thinks about his money printing fixation.

[Mike P]

The Fed's actions are being condemned around the world. Taking junk debt in exchange for cash is NOT the Fed's mandate. Bernanke is doing everything wrong. We should be looking at Japan's costly actions during their crisis, and also, how Sweden handled their market crisis quickly in the 90s by recapitalizating their investment banks. Until we get the toxic junk debt on the books, we'll never be certain of who is strong and who is not, and the credit market will remain frozen.

Bernanke and the Fed are in panic mode, and everyone around the world knows it.

[Jay Chawla]

An earlier poster called this transaction a "bailout for irresponsible borrowers." It's actually a bailout for irresponsible lenders. At $2 per share Bear Stearns equity owners already lost, effectively, all of their money. This "bailout" was actually a government-imposed theft from JP Morgan's creditors, who could have organized, taken over Bear Stearns, and made money, and from responsible traders generally who have maintained the liquidity to buy in a fire sale. The federal government gave Bear Stearns to JP Morgan for NOTHING -- it's a gift, and they're paying closing costs too. The losers here are traders that dealt smartly with Bear Stearns and traders in general who are in a position to buy undervalued assets, and the winners are traders that dealt stupidly with Bear Stearns, and of course, JP Morgan.

It's a naked wealth transfer from smart people to two other classes of people: stupid people and politically connected people. This is not a bailout: it is a THEFT.

[Mark Too]

Bear has failed. Our financial system is in turmoil, that's why the Fed agreed to backstop the $30 Billion. If they didn't, this mess would spread to other institutions, and there is no guarantee that it won't. Most of the investment banks are leveraged up to their eyeballs and can get sucked under at any time. Many commercial banks aren't in much better shape.

A .25 point rate cut announced on a Sunday. When was the last time you have seen something like that? The Fed announced this past Tuesday that they would take up to $200 Billion in paper from the banks to help shore up the banks balance sheets. When was the last time we have seen something like that? The Fed is taking measures that they haven't taken since the Depression.

Our financial system is facing some very serious problems.

[Dave]

>Why the hell are TAX PAYER dollars
>being used to bail out greedy banks???????

Just a note that the Fed has considerable resources of its own from regular fees paid by member banks. So when the Fed makes a move like this, it is dipping into its own reserves, not taxpayer funds. As well, the borrower will pay interest on this loan, which is income that goes back into the Fed kitty.

This is not a comment on whether or not I approve of this move, just a correction to the misconception that the Fed acts with tax dollars in situations like this. It does not.

[Digitalian]

Smart money is on Lehman Brothers being next in line to get whacked. The question in that case is what will the Fed and it's pals on Wall street do then?

[Winfield J. Abbe]

It is difficult to find words in the polite English language to describe this use of taxpayer printed money to bail out criminal activity of so-called mortgage bankers and the New York Las Vegas Stock Market gambling machine or casino. Why the federal reserve is so intent on seeking to fool investors around the world, they rushed this deal without possibly knowing the risks all are taking. These are not intelligent businessmen, but inmates who have taken over the asylum, willfully shafting the responsible citizens of this country who have struggled with their sweat and blood to purchase, live in and pay off their contracts for their homes. Many live on fixed interest incomes which are arbitrarily and capriciously being reduced in value every minute by these criminal thieves running our government. Please, all of you bums involved in this debacle, jump out the nearest window as your good for nothing predecessors did in 1929. Do us all a favor and point a gun at your skull and pull the trigger before the Supreme Court even nullifies the 2nd Amendment next week. You are all nothing but a buch of criminal good for nothing thieves and crooks, gang raping what is left of this United States of America. I hope and pray you all die a slow death in hell where all you greedy so and so's belong.

[Joseph T.]

This sort of intervention by the Fed is hardly unprecedented, although rarely popular. In 1998, the Fed organized the bailout of Long Term Capital Management, a failing hedge fund. Similarly to JP buying Bear for far less than its book value, a consortium of banks purchased LTCM for a fraction of its value at its peak. In fact, the parallels are interesting. In 1998, there was also panic in the credit markets triggered by the Asian crises and Russia's default causing large write downs by the banks, enormous volatility in the markets, and a flight to quality as, just like now, everyone dumped risky assets to acquire safe ones.

In 1984, Continental Illinois failed following a bank run and the government organized a rescue, took it over, invested around 4b (I think) and eventually sold it to B of A. Even long before, in 1890, the Bank of England rescued Barings after major losses in Argentina threatened the integrity of the system.

The present situation has far more resemblance to these than the Great Depression. Looking at mortgages (which, of course, triggered the present problems) something on the order of 4% are probably bad. The problem, of course, is that nobody actually knows where the bad ones are. In the Depression, the Depression, something on the order of 50% of mortgages failed. Additionally, the Depression was worldwide which, combined with high tariffs and the Imperial Preference in the British Empire, meant that foreign trade could not help compensate. For all the problems that the falling dollar indisputably entails, the current account balance, while still appallingly unbalanced, has improved a fair bit driven by relatively less expensive US exports.

I am not trying to diminish the scope of the current problems, nor am I completely at ease with the rescue (mostly out of concern for moral hazard) but there is good reason behind it. If Bear collapsed entirely, all its assets would get dumped onto the market, further depressing the prices and triggering more write downs by the other financial institutions, weakening the system as a whole. Else there is the risk of more runs and, while the giants could probably survive, some of the smaller ones like Lehman would be at risk. Bear is a major clearing house and those operations are very valuable and very important to maintain.

[Winfield J. Abbe]

Let's have a new national law tomorrow morning prohibiting anyone anywhere in the United States from ever again describing our economic system as "The Free Enterprise System". This is the biggest lie in the world as proved for all to see this Sunday afternoon by the criminals running the Federal Reserve Bank.

[Michael Snyder]

Now I know why Paulson looked like a scared rabbit during his interview on Fox News today. In a report on http://www.bloomberg.com titled, "U.S. Fed Cuts Discount Rate, Says Dealers May Borrow (Update3)" Scott Lanman lays out the latest of the Fed's "good ideas".

"The Federal Reserve, in an emergency weekend decision, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to primary dealers in government securities.

In an announcement before the start of trading on the Tokyo Stock Exchange, the Fed lowered its so-called discount rate by a quarter of a percentage point to 3.25 percent. The central bank also approved the financing of JPMorgan Chase & Co.'s purchase of Bear Stearns Cos., including support for as much as $30 billion of Bear's assets.

Fed Chairman Ben S. Bernanke is stepping up efforts to keep strains in financial markets from spiraling into a full-blown meltdown. Last week the central bank agreed to emergency loans to a non-bank, Bear Stearns, for the first time since the 1960s. Fed officials also announced a program to swap $200 billion in Treasuries for debt including mortgage-backed securities.

``The Fed needed to act decisively, and I believe it has,'' said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. ``It is a crisis of confidence that these measures are trying to'' alleviate, he said.

The dollar tumbled to a 12-year low against the yen after the announcement and Treasury notes rallied in Asian trading. The Nikkei 225 Stock Average lost 3.1 percent at 9:35 a.m. in Tokyo.

From tomorrow, primary dealers will be able to borrow at the rate under a new lending facility, to be in place for at least six months, the Fed said. The Fed will accept a ``broad range'' of investment-grade collateral. "

Broad range of collateral my a**! Translation; bring us your bad subprime paper, bring us your junk bonds. Loans made against car leases and high risk consumer credit. Got major defaults in your receivables? No problem! Facing BK? Bring it on! The American taxpayer is an inexhaustible fountain of wealth and there's plenty for everybody! Cal Worthington would be proud.

As of this posting the NIKKEI is in a nosedive that would make a kamikaze wince. Most folks are content to just shoot themselves in the foot. It seems Bernanke & Paulson have just blown their's clean off.

[BottomFisher]

Lesson learned in the 1929 crash & depression was that unregulated capitalism eventually brings down the system thru greed and corruption....so here we are again....years of outrageous house price increases and unregulated lending...liar loans and liar financial institutions who walked away with billions in profits....Bush administration and Greenspin Fed asleep at the switch.....now we are ALL gona pay.... BIGTIME.

[Steve Harrington]

Right now the economy is 20% finance and only 13% manufacturing. Remember when capital was used to finance manufacturing? Now finance is used to finance more finance. This is crazy.
Only when the economy is based once again on people selling valuable goods and services to each other will this craziness end. Finance is not an end in itself, but a means to increased commerce.
Creativity is great in art, architecture and engineering, but it is not so welcome in banking, at least not in the long term

[gene Foss]

Hey people, think about what folks have said in this blog! It is happening, all is unraveling......Buy gold.....the markets are saying the US dollar is falling.... it well no longer be the reserve currency......there are ways to capitalize on this ..............gene

[Frank F]

$30 billion of your and my tax money spent to allow JPMorgan to make this deal! How many American kids could we have provided with health care for that price?

[jbunniii]

Joseph T. - perhaps 4% of mortgages are bad today, but the downturn has only just begun. We aren't even officially in recession yet. The depression went on for about 10 years, so roughly 5% of mortgages failed per year. We're roughly on track. Recall also that the US entered the depression as the world's largest creditor nation. Today we're the world's largest debtor nation. Food for thought.

[Matt]

Bear Stearns went for less than 250 million....its manhattan office building alone (which it owns) is worth around 1 billion according to reports...That means that when JPMorgan sent in the accountants to evaluate the balance sheets, they probably decided that Bear's business was worth NEGATIVE 1.25 BILLION.

Holy crap! This is going to be a crazy week. I'm just thankful I have my health, food to eat, and a place to live.

[thomas conrad]

I want to know..who are the "smart" people that wanted to change the game when it comes to this hosuing mess..for years the mantra was ..20% down, no more that 33% of income could be used for the mortgage, solid credit etc...what happened to this reasoning...I know greed was the motivating factor but these folks need to be called out on the carpet...

[Gene Foss]

You have a great since of humor, Matt. Thats why I dont give a sh*t any more! Bought a catamaran, and I'm sailing between Islands off SoCal. Move your portfolio to Int'ertnal socks in other money than US dollars! My sail budddies r in denial. Many readers of this blog r in denial. Oh my god, could this be happening to the might USA! YES it is.....gene