Bear Stearns Sold to JPMorgan Chase

Investment bank Bear Stearns will be purchased by its rival JPMorgan Chase for a little under US$240 million in a deal announced on March 16. The stock-swap buy-out prices Bear Stearns' shares at under a tenth of what they were worth at the end of trading on Friday, March 14, when it received emergency federal funding to stem a run on the bank.

The agreement - which was rushed to completion before world stock markets reopened on Monday - marks a stunning reversal in the fortunes of Bear Stearns, the fifth largest securities firm on Wall Street, which reported profits of US$2 billion in 2006.

Bear Stearns shareholders will be receiving JPMorgan stock equivalent to about US$2 a share, compared with the US$30 share price it had on March 14. The U.S. government swiftly approved the deal and the Federal Reserve said it will provide funding, including backing for up to US$30 billion of Bear Stearns' less liquid assets.

JPMorgan said it is guaranteeing the trading and investment banking obligations of Bear Stearns and its subsidiaries until Bear Stearns' shareholders approve the deal, expected to be some time in the second quarter.

"Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk," Jamie Dimon, JPMorgan's chief executive, said in a statement.

New York-based Bear Stearns has been hard hit by the meltdown in investment vehicles tied to subprime lending - loans issued to borrowers with little or no credit who ultimately find it difficult to meet the financial obligations of the mortgages they have signed. To date, Wall Street banks have written off or reported losses totaling some US$200 million related to such investment vehicles.

"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," Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners, told the Associated Press.

Thus the U.S. government's interest in resolving the Bear Stearns' situation as quickly as possible: It wanted to restore confidence in global markets.

"To see a situation involving a bailout lead to shareholders getting pretty much wiped out is a pretty significant event for the market," Ben Wallace, who helps manage US$800 million for Westborough, Massachusetts-based Grimes & Co., told Bloomberg News.

In a further effort to calm markets, the U.S. Federal Reserve dropped the discount rate it charges on direct loans to banks by a quarter of a percentage point to 3.25 percent, effective immediately, and announced a new lending program through which it will lend to other big financial firms, according to the Reuters news agency.