JPMorgan to buy Bear for $2 a share By JOE BEL BRUNO
and MADLEN READ, AP Business Writers
NEW YORK - Just four days after Bear Stearns Chief Executive
Alan Schwartz assured Wall Street that his company was not
in trouble, he was forced on Sunday to sell the investment
bank to competitor JPMorgan Chase for a bargain-basement price
of $2 a share, or $236.2 million.
The stunning last-minute buyout was aimed at averting a Bear
Stearns bankruptcy and a spreading crisis of confidence in
the global financial system sparked by the collapse in 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, showing the urgency of completing 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
JPMorgan Chase & Co. said it will guarantee all business
such as trading and investment banking until
Bear Stearns' shareholders approve the deal, which is 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, two World Wars 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 on Tuesday. Before
the emergency move to lower the discount rate, which is 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.
"Having taking Bear Stearns out of the problem category,
and the strong action by the Federal Reserve, we would anticipate
the market will behave quite differently on Monday than it
was Thursday or Friday," Cavanagh said.
Some analysts expected it to be a brutal day for global stocks,
nevertheless. Shortly after the news broke, Japan's benchmark
Nikkei stock index plunged more than 3 percent in morning
A bankruptcy protection filing of Bear Stearns could have
heightened anxiety in world financial markets amid a deepening
credit crunch. So far, global banks have written down some
$200 billion worth of securities slammed amid the credit crisis
more write-downs could come. Last week, a bond fund
controlled by private equity firm Carlyle Group faltered near
collapse because of investments linked to mortgage-backed
JPMorgan's acquisition of Bear Stearns represents roughly
1 percent of what the investment bank was worth just 16 days
ago. It marked a 93.3 percent discount to Bear Stearns' market
capitalization as of Friday, and roughly a 98.8 percent discount
to its book value as of Feb. 29.
"The past week has been an incredibly difficult time
for Bear Stearns," Schwartz said 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 the 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
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.
This is not the first time Bear Stearns has earned a place
in Wall Street history. A decade ago, Bear Stearns refused
to help bail out a hedge fund that was deemed "too big
to fail." On Friday, the tables had turned, with the
now-struggling investment bank in need of the same kind of
Bear Stearns was founded in 1923 and in recent years was
best known for its aggressive investing in mortgage-backed
securities and what was once a cash cow turned into
the investment bank's undoing.
In June, two Bear-managed hedge funds worth billions of dollars
collapsed. The funds were heavily invested in securities backed
by subprime mortgages. Until that point, subprime mortgage-backed
securities were immensely popular with investors because of
The funds' demise and subsequent problems in the credit markets
called into question Bear Stearns' ability to manage its own
risk and the leadership ability of then-Chief Executive James
Cayne. Critics of the company said Cayne spent too much time
away from the office last year playing golf and bridge as
the problems unfolded.
Cayne is the same executive who refused to let Bear Stearns
provide support as part of a Federal Reserve-led plan to rescue
Long-Term Capital Management in 1998. His reticence was said
to deeply anger some of his fellow Wall Street CEOs, and the
episode came up every time Bear was reported to be in trouble
in recent months.
Cayne took over from the legendary Alan "Ace" Greenberg
in 1993. Greenberg joined Bear Stearns as a clerk, working
his way up through the ranks to eventually take over as CEO
in 1978. Greenberg was known for his irreverent style, and
his regular memos to employees were turned into a book called
"Memos from the Chairman."
Before Greenberg's ascendancy to CEO, Bear Stearns began
to expand from its New York roots throughout the 1950s and
1960s, opening international offices and expanding its U.S.