Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street his company was not in trouble, he was forced Sunday...
NEW YORK — Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street his company was not in trouble, he was forced Sunday to sell the investment bank to rival JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.
The stunning last-minute sale was a move to avert a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system sparked by the collapse of 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 fall.
The Federal Reserve and the U.S. government swiftly approved the all-stock buyout, showing the urgency of doing the deal before world markets opened today.
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Asian markets, however, were down sharply at midday with Japan’s benchmark Nikkei stock index and Hong Kong’ Hang Seng Index off more than 4 percent.
The Fed 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 a recession.”
Sunday night, JPMorgan CEO Jamie Dimon held a conference with the heads of major U.S. financial companies to allay their concerns about doing business with Bear Stearns.
JPMorgan Chase, one of the few big banks relatively unscathed by the subprime crisis, said it will guarantee all business — such as trading and investment banking — until Bear Stearns’ shareholders approve the deal, which is expected during the second quarter. The acquisition includes Bear Stearns’ midtown Manhattan headquarters, believed to be worth more than $1 billion.
JPMorgan Chief Financial Officer Michael Cavanagh did not say what would happen to Bear Stearns’ 14,000 employees or whether the 85-year-old Bear Stearns name would live on. He told analysts and investors JPMorgan was most interested in Bear Stearns’ prime brokerage business, which does 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.
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 is connected.
After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, federally backed bailout Friday. The deal, the first of its kind since the 1930s, gave Bear a 28-day loan from JPMorgan with the government’s guarantee that JPMorgan would not suffer losses.
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 deemed “too big to fail.” On Friday, the tables had turned, with the now-struggling investment bank in need of the same kind of aid.
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 collapsed. They were heavily invested in securities backed by subprime mortgages. Until that point, subprime mortgage-backed securities were immensely popular because of their profitability.
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-CEO 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.
Material from The New York Times was included in this report. AP business writers Jeannine Aversa in Washington and Stephen Bernard contributed to this story.