Mumbai: In a deal that has sent tremors through markets around the world, commercial bank JPMorgan Chase announced a deal to acquire beleaguered investment banker Bear Stearns for a mere $2 a share, less a tenth of the firm's market price of $30 per share on Friday 14 March.
Bear Stearns was grappling with a run on the bank as its investors were so fearful about the future that they couldn't make even overnight loans to the nation's fifth-largest investment firm.
Almost driven to bankruptcy by this run on the bank, the deal will see JPMorgan and the Federal Reserve bail out mammoth trading obligations of Bear Stearns in a rescue plan that is geared more towards stemming a financial crises (See: US Fed bails out Bear Sterns through JPMorgan Chase).
As the race was all about completing the takeover agreement before the opening of the Asian financial markets on Monday morning, the widespread fear was that if Bear Stearns was unable to find a buyer, panic in those markets could spread globally.
JPMorgan agreed to pay around $270 million in stock for Bear Stearns, which had run up huge losses on its investments linked to mortgages. Bear Stearns shareholders would feel rather short-changed with the deal, as JPMorgan's deal includes the bank's 14,000 employees, and Bear Stearns's soaring Madison Avenue headquarters.
The deal is an unparalleled discount to the firm's closing price of $30 on Friday. A week prior, Bear Stearns traded at above $60, and around a year ago it was at over $150. On Friday, Bear Stearns executives had told analysts and investors that the firm's book value, - its assets less its liabilities, was still at a minimum of $80 a share.
In a conference call with reporters, Fed Reserve chairman Ben Bernanke said that the Fed was working to promote liquid, well-functioning financial markets, which are essential for economic growth. The Fed's moves in the Bear Stearns case were meant to ally widespread panic at Wall Street as banks and other institutions find it increasingly uphill to access credit. Reports, however, suggest that while the Fed's steps may head off a broad run on other Wall Street banks, they are unlikely to do anything with the recent volatility on markets.
Had Bear Stearns been allowed to fail, analysis opine that it would have created a domino effect on confidence, which would have had the strength to bring down several other leading firms, and drag world markets down with it.
JPMorgan Chase is one of the few Wall Street firms that has come out relatively unscathed from the meltdown in the markets for US mortgage loans and other debts.
Founded in 1923, Bear Stearns has 85 years of history behind it, including chapters on weathering the Great Depression and a dozen odd economic downturns. However, it took a remarkably short four days to sink. However, reports indicate that what could follow now would be a slew of shareholder lawsuits against the firm, if it comes to light that Bear Stearns officials were aware of the bank's eroding value, but failed to disclose the information .
To prevent a replay of the Bear Stearns story, the Fed now proposes to make available funds for investment banks, so long as they put up collateral, thereby acting as a lender of last resort for around 20-odd Wall Street firms.
So far, it has been a last resort lender only for commercial banks. From now till at least six months on, this new arrangement will ensure access to funds for "primary dealers," numbering around 20 major Wall Street firms, in exchange for assets in which the market is not currently functioning. The Fed has agreed to provide financing of up to $30 billion of Bear Stearns less liquid assets; around two-thirds of those funds will back mortgage securities held by Bear Stearns.