Nervous yet? The world’s central bankers certainly are, as the sudden collapse of Bear Stearns, the nation’s fifth largest investment firm, raises fears of a financial collapse unseen since the days of the Great Depression.
Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.
The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies’ boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday’s close, Bear Stearns’s stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.
Wow. A 93% discount off of Friday’s close. Now that’s what I call a bargain, especially considering that Bear Stearns’ Manhattan office building is valued at around $1.2 billion, more the five times the price of the buyout. So… how much liability is J.P. Morgan assuming?
JPMorgan said that in addition to the loans extended to Bear on Friday, the Fed had agreed to fund up to $30bn of Bear’s less liquid assets – a move that will alleviate the need for a fire-sale of mortgage-backed securities.
That means you, dear taxpayer, are picking up the bulk of the risk, not J.P. Morgan. That’s the way things work in America: privatize the profits, socialize the losses.
Of course the Fed claims that Bear Stearns’ problems were unique, and that no other major US financial institution is on the verge of collapse, which I suppose is why they also cut interest rates a quarter point. On a Sunday. Ahead of an expected 1-point cut in the discount rate this Tuesday. And still, Asian markets and the dollar continue to fall… I wonder why?
As Bonddad wrote on Friday:
The only way to prevent this mess from happening again is to let some of the big banks fail. Then in the future when someone says, “let’s stop performing due diligence on borrowers” someone can respond with, “Bear Stearns tried that and they went belly up.” Now in 10 years, someone will say, “Let’s stop performing due diligence” someone will respond with “that’s a great idea. After the borrowers default, the Federal Reserve will bail us out.”
I guess that pull yourself up by your bootstraps, free market, rugged individualism stuff is only meant for us little guys.
In Tokyo, the region’s largest stock exchange, the benchmark Nikkei 225 index was trading at an almost three-year low. By midday, the index dropped 4.2 percent to 11,726.99, falling below 12,000 for the first time since August 2005.
[…] The declines in Tokyo came even as the Japanese central bank, the Bank of Japan, moved to shore up financial markets by injecting $4.1 billion into short-term money markets.