JP Morgan To BUY Bear Stearns At $2/Share; Fed Acts
A: Wow, wow wow! I thought it was a typo as it passed across Bloomberg TV. It wasn't! JP Morgan agrees to buy Bear for $2/share or $270 Million! Bear Stearns stock price closed at $30 on Friday giving it a market cap of just over $4B; nothing like losing $3.5B over a weekend!
Needless to say, shareholders of BSC are screwd! Employees holding company options are screwd! We are certainly in unprecedented times. The very idea that the buyout is at $2 per share makes me wonder how bad the books were as executives at JP Morgan and fed officials reportedly worked diligently this weekend to get a deal done before Asian stock markets open!
According to Yahoo Finance:
JPMorgan Chase says it will acquire rival Bear Stearns for $2 a share in a move aimed at averting spreading panic in the financial markets over tightening credit.Bear Stearns (NYSE: BSC) closed at $30/share on Friday and seem headed for a nosedive when markets re-open tomorrow morning. The article mentions that the deal was "aimed at averting spreading panic", but at $2/share, umm, what are we supposed to have faith in?
JP Morgan says the all-stock deal has received the required approvals from the federal government and the Federal Reserve.
The Fed will provide special financing to JPMorgan Chase in connection with the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.
UPDATE @ 7:30PM: Futures JUMP as the fed cuts discount window by 25 bps and announces that the federal reserve bank of NY will create a new lending facility for primary dealers. Thanks to Calculated Risk for the speedy report as the rest of the world gets hit with this Bear news:
Federal Reserve moves:
1) The Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.
2) The Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.
UrbanDigs Take: I understand the markets will like the fed discount window cut and lending facility, but what is good about any of this? Investment banks should wake up to a dose of reality on Monday. This fed move sounds very panicky to me; and I'm sure most traders who think like I do will agree. The TSLF that the fed announced on Tuesday, that rallied the markets over 400 points, doesn't kick in until the end of the month, hence this Fed Reserve Bank of NY deal goes into effect tomorrow; things that make you go hmmmmmmm! I guess the the secondary markets needed a boost ASAP, and couldn't wait another 2 weeks!
Got Gold?
Posted by uwsider
Sun Mar 16th, 2008 07:30 PM
I thought it was a typo too! I waited to get the news from 3 different source before I could believe it!!!!!
wow.. how toxic must their books be??!! and i'm sure they're not the only ones
Posted by Noah
Sun Mar 16th, 2008 07:50 PM
crazy! and the credit story gets another chapter!
Posted by Brenda
Sun Mar 16th, 2008 08:39 PM
Take a look at the Japanese market. Bad, bad, and more bad. Bear at $2 per?
Posted by Noah
Sun Mar 16th, 2008 08:52 PM
just so you guys know, when I was writing the update just before 7:30, right after the fed moves were announced, S&P futures went to 15, DOW futures to UP 90 or so. That is why I said, "I understand the markets will like the fed discount window cut and lending facility, but what is good about any of this?"
Well, futures getting hit now:
DOW is -190
S&P is -25
NAZ is -30
Posted by Dmitriy
Sun Mar 16th, 2008 09:45 PM
Noah, what do you think this will do to the mortgage rates?
My rather amateur take is that they will plummet over the course of the next few days. Mostly due to investors seeking a safety haven in the bond market; Thus raising the price of the treasury notes, subsequently lowering their respective yields...
Thoughts?
Posted by Noah
Sun Mar 16th, 2008 09:53 PM
I think they will stay flat or rise. Secondary mortgage markets are just not functioning, and with this crazy uncertain environment, everyone is very cautious how they spend their capital when there is no liquidity in secondary mortgage markets.
Rates are no longer tied to FFR or Bond yields:
http://www.urbandigs.com/2007/11/bond_yields_mortgage_rates_no.html
That was back in late NOVEMBER. As this credit crisis unfolds, margin calls spread, losers die out, etc..rates will continue to be pressured and secondary markets continue to be very tight. This news adds uncertainty, and you must wonder at what price they marked some assets to market at and how that will hit the valuation of the rest of the toxic paper held by banks/brokerages. More write downs coming!
Posted by colgin
Sun Mar 16th, 2008 10:28 PM
Great analysis from the Wall Street Examiner on the Fed's various panic-driven schemes. Let the government monetization of toxic mortgage-backed securities begin in earnest. Actual Fed release in black; Lee Adler commentary in red:
http://wallstreetexaminer.com/discuss/index.php?topic=6
Posted by JR
Sun Mar 16th, 2008 10:47 PM
I must be getting old. I found this much more exciting than today's NCAA tourney selections.
Should be an interesting St. Patty's day on wall street.
Posted by More Cowbell
Sun Mar 16th, 2008 11:04 PM
It's really a sad day and i'm personally disgusted. My heart goes out to people who hsve had long, hard working careers at Bear Sterns and had large portions of there retirements and personal assets in Bear Stock. 95% of the employees in the firm are innocent victims. I feel for them, and there families.
2 dollars. I just can't get ovet that number. I was stunned when I saw it. I actually read in Barrons this weekend that the Madison Avenue building alone is worth $12 per share. The books must have been a complete mess. Basically, this is huge windfall for Chase who will just make a killing in the BSC garage sale. All chase wants is the prime brokerage business...everything else will be sold in a firesale for nothing but profit.
I hope we learn from this. I hope we learn the dangers of leverage. I hope we learn how to be safer.
I alos hope we get a huge down-day tomorrow so we can start getting the markets to recover. I'll tell you, at 1275 on the S&P, i'm a buyer. In fact, we've just shown that we won't let anybody fail, so, that should show the markets some confidence.
Posted by Jac
Mon Mar 17th, 2008 12:49 AM
Oh man... I thought it was funny how we were all taking bets when the next round of layoffs were gonna happen... it was more or less writing on the wall... but man... I didn't think it was going to come this soon!
Posted by karim
Mon Mar 17th, 2008 09:54 AM
I don't understand why the FED is bailing out BS. Let the weak and the reckless disapear. Why the Fed is using taxpayers money to bail out Bear Stearn? If the company get back in shape, its not going to return the money afterall.
Posted by Noah
Mon Mar 17th, 2008 10:23 AM
I bought BSC this am at open! Couldnt resist!!
Posted by Noah
Mon Mar 17th, 2008 10:25 AM
Karim - your concern is validated but the fed did what they did because Bear approached them and they all knew that without this deal in place, Bear would have declared bankruptcy and it would have sparked a systemic meltdown in financial markets. Ramifications go way beyond just letting the reckless die at this point.
But I hear ya!
Posted by Beth
Mon Mar 17th, 2008 10:25 AM
Wow, this is indeed an unprecedented move by the Fed and indeed a sign that we are in troubled times. Only in rare circumstances would the Fed work out a deal like this and expand its discount window beyond its member banks.
karim, the Fed isn't using taxpayer money to 'bail out' Bear. It arranged for one of its member banks, JPMorganChase, to borrow from it's discount window.
A common misconception is that the Fed operates on taxpayer money; it doesn't. It earns a spread from is activity in issuing Treasurys, from the interest it charges banks that borrow from the discount window and from other payment-related activities (i.e. Fedwire).
Why is the Fed doing this? To save the economy as a whole. If Bear were allowed to fail the impact would spread over to the banking world and there would be a risk of massive bank runs never seen since the Great Depression.
Posted by uwsider
Mon Mar 17th, 2008 10:27 AM
Noah,
Could you provide some insight into why you think BSC was worth buying this morning?
Posted by Noah
Mon Mar 17th, 2008 10:39 AM
breakup value is $7B, or about $55/share. I figured risk reward was in my favor this am at $2.86. Only bought 500s, so its a minor stake for a TRADE ONLY!
Posted by Noah
Mon Mar 17th, 2008 11:08 AM
also, as JPM rises, so does the buyout price of BSC
Posted by Beth
Mon Mar 17th, 2008 11:52 AM
Also consider that the deal is not expected to close until June. Which means that the shareholders still have to vote on it. All the Fed did was approve the acquisition, paving the way. (again, unprecedented because an approval of this scale would typically take months).
Question is, would BSC shareholders have any alternative? Also, what are the terms that the Fed ironed out with JPM & BSC that might discourage any viable 'alternatives'for BSC shareholders? I suspect the deal is being arranged as a stock swap, so BSC shareholders will be compensated with shares of JPM.
Posted by Brenda
Mon Mar 17th, 2008 05:04 PM
I think I also read (correct me if I'm wrong) that if the shareholders vote nay JPMC retains control for twelve months and another shareholder vote will be held. Is JPMC just a temporary guardian until the liquidity/solvency issues are resolved?
Posted by Earl L. Crockett
Mon Mar 17th, 2008 05:40 PM
March 17, 2008
From: Earl L. Crockett
In Praise of Bernard “Little Berney” Bernanke
Being the reincarnated Jewish, or maybe Italian or Greek, grandmother that I am, I would like to rush over again to the Fed with another pot of chicken soup with matzo balls, linguini or chick peas, as the case may be, and make, sure that Little Berney is wearing the heavy wool sweater that I knitted for him for the last big religious holiday. And I do hope that Little Berney is at least getting a few hours sleep on that nice military cot, now set up in his office, that was sent over personally by that nice boy Dick Cheney, in place of his, Dickey Boy’s, assistant Dubya “B”, who was too busy making TV videos ad-nauseam last week about how he would like “the dollar to be stronger.”
Enough of that, well…more than enough. The newspaper press doesn’t seem to get the amazing commitment that Bernanke has extended in just the last two weeks. The press is full of “$200 billion in funds” stories that seem to be like the partisan crowd at the Super Bowl cheering the last touchdown without them ever looking at the score board total from last summer. To date, Bernanke has laid out $360 billion between the “summer of 2007” and the end of the year 2007, $70 billion each in January and February for a total of $140 billion, started off with a bang in the first week of March 2008, with $100 billion in TAF funds, and another $100 billion for “related financial markets” (where do you think the $90 billion in support came from in the Bear-Stern’s bailout) with a commitment to extend these funding amounts for “another six months if needed” and then stepped right back in a week later on Tuesday March 11, 2008, and popped for another $200 billion for “bad” loan paper, forget about AAA Treasuries etc. So the “score board” since last summer now totals $900 billion with the above promise of “another six months if needed” leading to a potential of already committed and then “promised” funds through September 2008, of $2.1 Trillion.
The above number crunching, has led me to “get”, and conclude, rather than “believe”, that Professor Bernard Bernanke PhD knows exactly what he’s doing down to the closest $100 billion. And why do I say that? Well… the estimated sum total of the US National Banking System equity is $2.2 trillion. If Bernanke goes beyond his already laid out, and promised amounts, it would be like your local bank “lending” more money to your neighbor,
who has zero, or upside down, equity in his/her home, and your “neighbor probably has already told you that he/she is getting ready to “walk away”.
To further my point about this being ultra-extraordinary times I will point to the Fed discount rate being dropped yesterday on a Sunday, a Sunday! It seems like the distinction, “business hours” has faded into history with about all of the other financial market “truths” that we once looked for, for comfort. Tighten your seat belts, boys and girls; it’s going to be one hell of a spring.
Earl L. Crockett
PS: My “financial market prayer” of the morning, “Will someone please tell me that I’m all, and totally, wrong about all of this”
References
1.0 “Through the Looking Glass, and Down the Rabbit Hole”, March 8, 2008, ELC.
2.0 “ Calling a Spade a Spade” March 10, 2008, ELC
3.0 “Testing the Assumptions” March 13, 2008. ELC
References available if requested by email:
earlcrockett@sbcglobal.net
Posted by Duric Aljosa
Mon Mar 17th, 2008 07:36 PM
Houston, we have a problem - Bankruptcy!
Jack: "What is happening in the US?! So, as we all know Bear Stearns more or less went bankrupt... Then JPMorgan buys them for 2 Dollars a share before the markets even open on monday! And the FED cuts rates by 0.25% on sunday?"
John: "Oh, I guess you didn't get the memo? I think we just went bankrupt, those dollars you were using are now worthless, it's time to launch the lifeboats!"
Jack: "Holly, Holly, Holly, John, we are 300 milles over Atlantic and without oxygen!"
Posted by lenny
Mon Mar 17th, 2008 10:02 PM
Duric..watcha smokin!!
Just buy some gold..and pray people change..its about time!
THE MORAL CORECTION HAS BEGUN
Posted by justin
Tue Mar 18th, 2008 04:39 AM
I have trouble feeling bad for the staff: they paid themselves VERY well benefiting from the securitization of the very mortgage products which are so toxic now.
A lot of the smarter ones will pickup big retention bonuses from JPM. JPM have setup a HUGE fund for this, 24 times bigger than their paltry offer to shareholders. It is common stock holders (outsiders) who really got shafted.
By the way, will this take the heat off the nyc market? I just can't see wall street (which is responsible for so much taxable income in nyc) extending themselves for that $5m apartment in quite such a carefree manner..
Posted by mike
Tue Mar 18th, 2008 09:36 AM
just remember how much of that "paid themselves very well" was in common stock. That $1 million bonus paid in 2007 - which was more like $200k cash and $800k in stock is now about $10,000. The people that just a few days ago had millions of dollars, now have $10,000. Imagine if your retirement account dropped 98% in a year...
You can't help but feel bad for them and it doesn't matter how much we're talking about. One bank won't have a huge impact. Most of the cash there already owned or live outside the city. The majority of those living in the city that worked there wouldn't have been in more than the rental market this year anyway. Of those who owned a place, some might have to sell, that remains to be seen.
I doubt JPM will pay very much to retain people that they can have basically for free. There are no other jobs out there.
Posted by Noah
Tue Mar 18th, 2008 12:29 PM
out of BSC just now. that was fun!
Posted by JC
Tue Mar 18th, 2008 12:39 PM
http://nymag.com/daily/intel/2008/03/jimmy_cayne_closes_on_sweet_pl.html
how is he going to pay for this now ?
Posted by Ryan Fredds
Wed Apr 2nd, 2008 09:19 PM
It seems like the Feds are guessing at how to bring the economy around.