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

[lance sjogren]

Well, for those who view this as a bailout- I could be wrong but it doesn't look like it to me. The Fed provides a loan guarantee on a modest amount of debts. Which will cost the public nothing unless JP Morgan itself goes bankrupt.

As to Bear Stearns, those who comment about it being a bailout should consider that the shareholders of Bear Stearns are being essentially totally wiped out by this. They get maybe one cappucino out of the deal.

You should see what they are saying on Bear Stearns stock message board on Yahoo. They are not happy campers.

The question of course is, how much further does this run.

One thing I should point out is that every step of the way in the housing/credit crisis the bubblevision economists have been wrong and the doomsday economists, e.g. Peter Schiff, have been correct.

The bubblevisionaries continue to be clueless. $1000 gold, how can that be. Must be a bubble! Nope, no bubble. Gold is just beginning an upward adjustment to its true value in an environment of rancid paper money such as those counterfeit bills called "US Dollars".

For those who don't know where you find the REAL story, not the "don't worry be happy" spin of the bubble media, check out financialsense.com

[jbunniii]

Matt - don't forget that JP Morgan also required $30 billion of the Fed's money (i.e., our money) in order to close the deal, which suggests that Bear's actual value was more like negative $31.25 billion. It's not clear why blowing $30 billion of our money and signaling to the markets that the Fed is in full panic mode was preferable to simply letting Bear Stearns go bankrupt.

[lance sjogren]

Gene, you have got a sound perspective.

One contrarian commentary I heard a few months ago put the nail on the head. The guy commented that all the establishment economists and business media think nothing bad can happen because "bad things don't happen to good people".

Our country has lived the good life for decades, buoyed on an ocean of cheap oil. The party will soon be over. We are headed for hyperinflationary depression. All the "solutions" being proposed by all the politicians will simply make things worse. The best hope is that the actions by the politicians are timid enough not to cause too much more wreckage.

Some of the proposals on mortgage bailouts could actually destroy the entire mortgage system, causing home prices to plummet to the $10,000-$50,000 range.

(I'll be buying if and when that happens)

Our best hope is that the public will eventually realize that our economic problems won't be solve by the same people who created them in the first place. I don't know what a detailed solution would look like, but I do know that one of its central elements will be abolition of the Federal Reserve system.

[Roger Moore]

Who wants to bet that the golden parachutes for Bear Stearns management will exceed the sales price? If there's a real financial crime here, it's that the managers who ran Bear into the ground are likely to do a lot better than their shareholders.

[steveRB]

Does this mean that everyone who has stock in Bear Stearns just saw the stock price drop from $30 to $2 over the weekend?

[0.01%]

Matt, your logic flawed. Their office building is just another asset on their balance sheet like all the rest of their asset. Collectively JP decided that the total shareholder's equity was worth a nominal $2 a share which will probably be eaten up by the closing costs of the deal.

Another interesting point is how valuable is that building now that it's major tenant has vanished in thin air? How many other jobs will be lost in the FIRE sector of Manhattan? Does that lead to an overnight devaluation of the property from $1B to $0.5B? Where are office rents in Manhattan headed in light of this veritable calamity?

When will we see true market capitulation? I think that the S&P and the Dow have held up remarkably well throughout this crisis. This is a much needed market adjustment. When the bottom is established we will look back on this as an unbelievable buying opportunity in US financials, once the envy of the western world and not the pariahs. Leave it to American ingenuity and innovation to get us out of this mess.

[Jerry Waters]

Are you surprised? Our government has no fiscal responsibility - never will be out of debt - and we expect the world to keep buying our paper? Of course we are in trouble. $12 billion a month in Iraq and the Rep. candidate says we will be there 100 years. The world isn't going to finance that. WAKE UP AMERICA! If this country was the guy next door would you lend him money?

[Dankster]

The weekend-brokered Bear acquisition move was intended to restore confidence in the financial and settlement system and show off the Treasury's/Fed's ability to quickly and decisively respond to an incipient financial crisis before it comes to a head.

Instead it seems to have scared the s--- out of people.

[lance sjogren]

jbunnniii said:

"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."

Hey, maybe China will bail us out! Wouldn't that be embarrassing. We might need to put a statue of Chairman Mao at the front steps of the White House.

But don't laugh- before this thing is over we will see things so strange that a statue of Mao at the White House will seem like the most normal thing in the world.

[MBY]

Having worked a BSC in NYC, I am not surprised it blew up and was sold so kindling. I've never seen more arrogant, thugish, and inept management team. The death rattle did come earlier than I expected...

[Kaonashi]

I see three steps coming, the first now and the second two only possible with a Democratic administration:

1. Stop the freefall;
2. Punish the wrongdoers as a deterrent;
3. Create a rational regulatory system to prevent reoccurance.

Obviously, the second two are crucial to long-term recovery and health, but their chance of happening in a Republican administration make the Heat look like contenders. Indeed, many say recent steps have been taken in part to stave off these second two.

[Mike S]

Where's Lefty? We could use a little humor here.

[amir]

I'd like to note on something that has nothing to do with housing.

The Fed's actions are debasing the dollar in an attempt to save the financial system. Let's pray this bet works.

However, because of it, we are facing a tremendous rise in energy and food prices, by double digit percentage points.

This is effectively a tax on the poor.

Let me repeat that: This is a tax on the poor!

And to a lesser extent, a tax on the middle class.

The rich are not really affected.

I am not poor and I am a capitalist. But this is unconscionable. Wicked. And it could threaten our democracy. It was a collapse of European middle class during the depression that resulted in Fascism and war.

It's going to be bumpy ride.

[MyLessThanPrimeBeef]

Wow, that's all I can say. This is perhaps the most powerful implosion in the whole universe, save the burst of a supernova.

I think Bernanke's Schroedinger's Cat strategy has failed - you know, the one about the quantum cat; it's both dead and alive and you don't know until you acutally open the box. I think it's time to come clean, which he has not done from the beginning. What other weapons of mass wealth destruction (MWWDs) are hidden there in the vaults of Wall Street firms? I suspect the main culprit to be credit swaps, the level III assets - they are much more destructive than your everyday CDOs, SIVs and MBSs.

By the way, the Bernanke regime has no credibility left. But heck, Iran must be really happy these days. They wanted to trade oil in currencies other than the dollar.

As for me, I am buying more gold, thinking about buying an extra mattress and collecting as many cowrie shells as I can.

[Karl in Burbank]

You aint seen nothing yet. Wait til LA houses fall from $500,000 to $40,000 over the weekend.

[GeekSeek]

A young man asked an old rich man how he made his money.

The old guy fingered his worsted wool vest and said, “Well, son, it was 1932. The depth of the Great Depression. I was down to my last nickel.”

“I invested that nickel in an apple. I spent the entire day polishing the apple and, at the end of the day, I sold the apple for ten cents.”

“The next morning, I invested those ten cents in two apples. I spent the entire day polishing them and sold them for 20 cents. I continued this system for a month, by the end of which I’d accumulated a fortune of $1.37.”

“Then my wife’s father died and left us two million dollars.”

[Dan]

It is clearly a bailout at taxpayer expense. They are lowering rates (i.e. causing inflation), making every taxpayer's dollars worth less.

[Mike S]

On a more serious note, hope nobody was planning to close on a mortgage this month. What was a liquidity problem now really is a crisis.

We now know the day historians will point to when our economy came unhinged. Tomorrow will be infamous and long remembered for revealing how badly folks lost faith in our financial sector. While a short week--market's closed on Good Friday, I suspect an early closing bell on Monday and Tuesday as folks make a run on the financials with the S&P500 below 11k by COB Thursday.

As much as Cramer is obnoxious on 'the Street,' his recent rant and tonight's posting were spot on.

[areles]

And finally everyone at the LA Land blog wakes up to the fact that this is about a lot more than housing price discovery.

MBY - I could tell you a story, but it's not mine to tell. Suffice it to say, you are speaking the god's honest, no doubt about it.

Roger - don't count on it. The guys at BSC are losing fortunes right now. I have it on good authority that at least a couple of guys well up the food chain were shareholders themselves and just lost everything. If they get the golden parachutes, they're probably going to need them (although they certainly don't deserve them), but you can rest assured that in the meantime, they are shitting bricks.

Now here's a question, though. Where on EARTH did all those put options come from last week? I have a feeling the SEC is going to be looking pretty closely at this.

[Keith]

The sky is falling, the sky is falling, ohhh noooooo......
Buy Gold, Tequila & hot sauce! Save yourself!!!!!!!

(chuckle, chuckle)

[Uncle Billy]

Stray Sunday Night Observations:

1) We'd better present a strong front to the world. Look as weak as we probably feel, and Bush's bad guys might just feel cocky enough to start tweaking our nose a little harder.

2) Schwartzman of Blackstone Group pulled in over $5B in compensation in 2007? Bush's yale buddy? $5B? Want to know where all the pension fund money is going? $400 crab and $50M houses. Further reading: http://tinyurl.com/2soajs

3) Paolo Pellegrini, the co-manager of Paulson & Co. hedge fund? The guys that made the big bucks shorting mortgages? His dad is a prof. of Physics at Univ. Milan. Where did Paolo come from? In 1996, he was pres. of "Overseas Risk Capital Associates" specializing in "International Insurance." That sounds like fun... wonder what that's all about.

4) Philip Falcone also made his big billions shorting mortgages. Interesting guy... orginally from MN, he played pro hockey in Europe before learning the junk securities business at Wachovia, etc.

5) Nouriel Roubini, the man who spread, perhaps, the most gloom of all over the economy, and may have done more to topple the house of cards than anyone, has an identity problem: On his resume webpage at the Stern School, NYU, it says he was born in Istanbul Turkey. From a magazine article interview in 2007, thoguh, he says: "I was born into a relatively orthodox Jewish family in Iran, lived in Israel and Turkey, and then moved to Italy as a child." Wikipedia article points out discrepancy. Is it Turkey, or Iran?

Sumthin' just doesn't smell right!

6) Have you noticed more and more in casual conversation that people start their sentences with something like: "I not into conspiracy theories or anything like that, but...."

[bottom line]

Who knew? The shrub, helicopter Ben, & Henry (he was John Ehrlichman's ASSt. in '72 & '73) Paulson were the world's biggest Socialists?? I guess this is all "Borrow & Spend Conservatism."

These guys couldn't balance a kid's $2 weekly allowance.

[David Raether]

A collapsing financial system.

A disasterous war that shows no sign of ending and is no longer being fought for the originally stated reasons.

A besmirched international reputation.

A debased currency.

Inflation.

Stagnation.

George Bush -- worst President ever.

[jaleh]

I don't have any Bear Stearn's stocks and I am sitting here speechless and shocked. WOW!! The country is run by criminials and 51% of Americans voted for them. We deserve what we get.

[giresu]

What is this country coming to? Soo many crooks and incopetent running the country.