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Bear Stearns gets bailed out by JPM (and the Fed)
JPMorgan to pay $2 a share for the capital markets,
investment-banking firm. JPMorgan Chase is using Federal Reserve
money to buy Bear Stearns at a steep discount, according to a
JPMorgan statement released today.
JPMorgan will pay $2 a share for Bear Stearns, whose stock ended
trading on Friday at about $30 a share. A year ago, Bear Stearns'
shares were trading at about $150 a share.
"The past week has been an incredibly difficult time for Bear
Stearns," says Alan Schwartz, Bear Stearns' president and CEO.
"This transaction represents the best outcome for all of our
constituencies based upon the current circumstances."
Fragility
For Elizabeth Nesvold, managing partner of New York-based M&A
consultancy Silver Lane Advisors, the Fed-funded transaction
between JPMorgan and Bear Stearns is a stunning development.
"What is incredible is the fact that this horror story is based
primarily on the perception -- not the reality -- that Bear was
having liquidity issues," Nesvold writes in a email to
FWR. "The take-away is how fragile the entire financial
system is."
The Fed, with a view, apparently, to stemming runs on big-name
financial institutions, is funding the transaction in part by
traditional means through its "discount window" and partly via
"special financing" whereby the central bank will fund up to $30
billion of Bear Stearns' less liquid assets.
Earlier last week, in another move seemingly calculated to shore
up financial institutions shaken by mortgage-market meltdown, the
Fed said it would start lending Treasury securities to primary
dealers over 28-day terms (rather than overnight) and start
lending backed by pledges of a broader range of instruments
including mortgage-backed securities.
JPMorgan says it expects the deal with Bear Stearns "to be
ultimately accretive to" its annual earnings.
Nesvold agrees. Once JPMorgan integrates the parts of Bear
Stearns it wants to keep -- trading and asset management along
with a few other pieces -- and sells the rest, she sees it
putting more than $1 billion in JPMorgan's coffers.
The fates of Bear Stearns' private-client and wealth-manager
custody businesses aren't yet known.
The transaction between JPMorgan and Bear Stearns is expected by
the end of June 2008. -FWR
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