JPMorgan Buys Bear on the Cheap


With bankruptcy looming, the banks reach a deal: JPMorgan will acquire the troubled investment house for only $2 a share

In the end, Bear Stearns (BSC), the once-storied New York investment firm that became the victim of an old-fashioned run on the bank, wasn't worth much more than a subway ride.

JPMorgan Chase (JPM), the big bank that helped bail out Bear last Friday, is paying just $2 a share to take over the investment firm, which a little over a year ago was trading for as high as $170 a share. The deal to buy Bear will avert a looming bankruptcy filing by the investment firm and potentially stave off a new crisis in the financial markets.

The purchase price is an indication of just how far things have fallen at Bear, which a year ago helped spark the subprime meltdown with the collapse of its two big hedge funds. The deal values Bear at $236 million.

The Buck Stops at JPMorgan

In the end, Bear's most valuable assets weren't its legendary prime brokerage and back-office clearing operation. Rather, it was Bear's new gleaming office tower in Madison Avenue, that some value a little short of $1 billion.

As part of the transaction, the Federal Reserve, which engineered last week's emergency bailout of Bear, will provide up to $30 billion of Bear Stearns' less liquid assets. "JPMorgan Chase stands behind Bear Stearns," said Jamie Dimon, chairman and chief executive of JPMorgan. "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk. We welcome their clients, counterparties, and employees to our firm, and we are glad to be their partner."

Bear Stearns CEO Alan Schwartz said in a Friday conference call that "nervousness in the market" prompted clients and lenders to "get cash out" of the firm. Schwartz says, "A lot of people wanted to act from the possibility of the rumors being true." He says before the turmoil, Bear had been working with investment firm Lazard (LAZ) to explore "alternatives" and those discussions will continue. Bear officials also said the decision to seek aid from JPMorgan was their decision.

The quick collapse of Bear is a sober reminder of just how quickly a Wall Street firm can lose the confidence of investors, traders, and other institutions. A week ago, Bear executives were talking about how the firm was poised to report a profitable first quarter, after the firm posted its first quarterly loss in its history in the fourth quarter. But in the span of seven days, Bear went from being Wall Street's fifth largest firm to another in a long line of investment firms to bite the dust.

In a conference call with analysts after the deal was announced, JPMorgan executives said the big bank will stand behind all of Bear's trades and pending deals until Bear shareholders vote on the merger. JPMorgan officials said Bear will be "open for business" Monday morning. The bank officials say they fully expect Bear shareholders to approve the deal because there is no better option.

Losers in the Deal

It's not clear what the forced sale of Bear to JPMorgan will mean for Bear's 14,000 employees. JPMorgan didn't discuss possible layoffs during the conference call Sunday evening. But there's no doubt the deal will mean the loss of hundreds, possibly thousands, of jobs at Bear. The deal also is a huge financial blow to Bear employees, many of whom count on company stock as their long-term compensation.

Other big losers are billionaire investor Joe Lewis, who bought a 9% equity stake in Bear as the stock began plunging last fall. Mutual funds that held stakes in Bear will also be losers. Those investors may feel that at $2 a share they are getting a raw deal and could reject the buyout.

A bigger question is how the bailout and forced sale will play on Wall Street. Overnight, the Asian markets sold off sharply and the plunge is continuing in the European markets. U.S. markets are also in for a turbulent day as investors ponder the thought of how a seemingly secure investment bank could evaporate literally overnight. Wall Street now will begin wondering which firm may be next to go the way of Bear Stearns, and many people are pointing fingers at Lehman Brothers (LEH).

Quick Work to Contain the Risk

It's not clear what had changed so dramatically at Bear to necessitate the emergency bailout. But events appear to have moved quickly on Mar. 13. People familiar with the situation say Bear officials called the Fed late in the day, saying the firm had a funding problem.

Officials from the Fed were at Bear's spacious offices on Madison Avenue all night, scouring its books and trying to devise a rescue plan. The Fed and Bear then reached out to JPMorgan, to find out whether the big bank could help out. JPMorgan, which has multiple business relationships with Bear, was inclined to do so. But only with some guarantee from the Fed that it would make JPMorgan whole if Bear were to fail and become unable to make good on its obligations.

It would have been highly risky for other Wall Street firms if Bear Stearns had been allowed to go under because they are tightly interconnected with Bear as both borrowers and lenders. Any firms that are owed a lot of money by Bear would have fallen under suspicion, on grounds that they might not be able to pay their own debts if Bear failed to pay them. That could have triggered a dangerous wave of defaults. The rescue by JPMorgan Chase gives the financial system breathing room to pay off Bear's debts gradually.

Goldstein is an associate editor at BusinessWeek, covering hedge funds and finance.

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