Fed and JP Morgan Bail Out Bear Stearns With Short-Term Cash
Posted: March 14 08, 2:42 pm
Bear Stearns has always been a second-tier investment bank in the shadows of Goldman Sachs, Morgan Stanley, and Merrill, but they stayed profitable by being a bit more conservative and focusing on their niche. But it looks like their foray into hedge funds and mortgage-backed securities may end their 85-run as an independent bank.
I think the aggregate size of the asset writedowns among financial institutions stemming from their forays into mortgage-backed securities will likely dwarf the assets that we transferred to the RTC during the S&L bailout (even adjusted for inflation). There is lot more money at play this time around. It's not going to be pretty.
From the NY Times:
http://www.nytimes.com/2008/03/14/busin ... nted=print
I think the aggregate size of the asset writedowns among financial institutions stemming from their forays into mortgage-backed securities will likely dwarf the assets that we transferred to the RTC during the S&L bailout (even adjusted for inflation). There is lot more money at play this time around. It's not going to be pretty.
From the NY Times:
http://www.nytimes.com/2008/03/14/busin ... nted=print
JPMorgan and Fed Move to Bail Out Bear Stearns
By LANDON THOMAS Jr.Bear Stearns, facing a grave liquidity crisis, reached out to JPMorgan on Friday for a short-term financial lifeline and now faces the prospect of the end of its 85-year run as an independent investment bank.
With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had “agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.”
For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.
“JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company,” JPMorgan said in its statement.
The rescue plan represents a devastating if not ultimately final blow for Bear Stearns, a scrappy and until now resilient investment bank that carved out a niche for itself by mastering the intricacies of the United States mortgage market.
But after two of its hedge funds that specialized in the subprime mortgage market collapsed last summer, Bear’s expertise became its Achilles’ heel as the plummeting market for complex securities tied to subprime mortgages severely damaged its core business.
In recent days, Bear’s stock has plummeted more than 20 percent as investors as well as clients and broker dealers have shied away from the firm, fearing that their continued exposure to plunging real estate assets threatened their solvency.
The announcement on Friday did little to prevent wholesale selling in the firm’s stock, which was down more than 40 percent, to $32.15 a share, shortly after 3 p.m., after falling as low as $26.85, its lowest level in nearly a decade.
On Wednesday, Bear’s chief executive, Alan Schwartz, said in an interview on CNBC that his firm had ample liquidity, but his words have not been enough to prevent what seem to be a classic run on the bank.
In a statement issued on Friday, he said: “Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”
While Bear may have some degree of short-term cash on hand, it is by no means sufficient if all its creditors demand to be paid at once. It has some valuable businesses like its hedge fund servicing and back office unit, as well as aspects of its real estate operations, but in light of the current market conditions it is unlikely to command a high price, especially from JPMorgan, which has said repeatedly that it is not in the market for an investment bank.