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 -- unti 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 Chie 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 th 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.
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