Big Bad Bear Stearns Bites the Dust

March 16, 2008 · Print This Article · Email This Post

Manhattan Office of Bear Stearns

With a swiftness that underscored the severity of Bear Stearns’ plight and in an attempt to prop up the U.S. economy and avoid a global financial meltdown tomorrow, it was announced late Sunday evening that JPMorgan Chase & Co. will buy the beleaguered Bear Stearns investment bank for about $2.00 a share in an all-stock deal. The fire sale price — the deal of the century — will total about $236.2 million and includes Bear Stearns’ headquarters in midtown Manhattan. Based on the average $1,000 per-square-foot price that similar office space commands in New York City, the 45-story, 1.2 million-square-foot Stearns building at 383 Madison Ave., constructed in 2001, is valued at about $1.2 billion. Bear Stearns’ stock closed at $30 a share on Friday, a far cry from the $2.00 per share at which the shares were valued this evening. To put it another way, the price JPMorgan is paying to acquire Bear Stearns represents about one percent of what the Stearns brokerage firm was worth 16 days ago.

Henry Paulson, Treasury Secretary

The near-collapse of Stearns will put further pressure on bank and brokerage firm stocks, which are already performing poorly. At about the same time that the Morgan-Stearns deal was announced, the Federal Reserve, which met in an emergency session even though they were scheduled to meet on Tuesday, slashed the discount lending rate to banks from 3.50 percent to 3.25 percent. While this move is also meant to shore up the economy, Pajamadeen thinks it will drive the dollar down further tomorrow and make the USD an even less attractive investment. Gold and the Euro should rise nicely. Henry Paulson, Treasury Secretary, defended the move and said that the government will do what it takes to avoid further unbalancing our weak economy. Paulson said he was in on the Morgan-Stearns talks this weekend, but didn’t elaborate. (Pajamadeen is thinking that there are only so many pieces of bailing wire which can be used to hold something together.)

The speed at which the U.S. Federal Reserve and the government approved the deal before world markets open on Monday showed the urgency of the situation. Bear Stearns shares closed Friday at $30 a share. JPMorgan will receive special financing from the Federal Reserve to close the deal, with the Fed funding up to $30 billion of the bank bail-out, in a move not seen since the Great Depression. The subprime mortgage crisis brought the house down. Last week, there was a run on the bank, with investors withdrawing $17 billion.

Alan Greenspan

There has been no financial crisis larger than this since the Great Depression, and former Federal Reserve chairman Alan Greenspan said this weekend that the economy is the worst it’s been since World War II. As Peter Dunay, a chief investment strategist at Meridian Equity Partners of New York put it: “This is going to go down in very historic terms. 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.”

Founded in 1923 as an equity trading shop, Bear Stearns weathered the Great Depression and went public in 1985. It became the country’s fifth largest investment bank and has offices in Beijing, Hong Kong, London, Milan, Sao Paulo, Shanghai, Singapore and Tokyo. Shares once traded as high as $159.36. Ouch. When Stearns looked for suitors yesterday to avoid bankruptcy, only JPMorgan and J.C. Flowers & Co., a private equity firm, showed up. HSBC Holdings Plc and the Royal Bank of Scotland Group Plc had previously expressed interest in a buy-out. Hundreds of Bear Stearns 14,000 employees worked yesterday to avert doomsday help coordinate the sale.

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Copyright © 2008


One Response to “Big Bad Bear Stearns Bites the Dust”

  1. pajamadeen on March 17th, 2008 6:02 pm

    Heard on the streets today: “They failed. They should pay for it.” We can bail out a bank, but not nearly two million homeowners facing foreclosure. A CNN reporter said: “On Main St., there’s a lot of anger that Wall St. appears to be getting a special deal.”