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Showing posts with label sub prime cirisis. Show all posts
Showing posts with label sub prime cirisis. Show all posts

March 18, 2008

JP Morgan Chase Buys Bears Stearns Wreckage

The year 2008 is indeed been the worst time globally to invest in stockmarkets. It also seems the worst times for those who have invested heavily in stocks for the last few years.

Troubles have poured in from one end to another with wild volatility in share prices all across the world,the rising world oil prices,the sub prime crisis and fears of recession in the United States.

Rounding it all off was the collapse of an 85 year old well know financial bank Bear Stearns (BSC). By Mar. 17, as JPMorgan Chase (JPM) bought up the wreckage of the once-proud firm at a rock-bottom price, a concerned Federal Reserve jumped into action to prevent that crisis from sinking the entire financial system.

The problems at Bear Stearns are linked not just to bad investments, but to the broad, deep decline in U.S. home prices. The damage from the U.S. housing crisis could be severe.

Many investors were hurt by the popping of the tech bubble in 2000 and 2001, but housing affects far more Americans, says Scott Armiger, who manages $1.7 billion at Christiana Bank & Trust Co. in Delaware. "It touches more lives."

Investors might be prepared for a mild slowdown in the U.S., but a deep, global recession would heighten the already considerable levels of pain in the market.

The Bear Stearns Companies, Inc. (NYSE: BSC) is the parent company of Bear, Stearns & Co. Inc., which was one of the largest global investment banks and securities trading and brokerage firms in the world. The firm's main businesses included capital markets (equities and fixed income), investment banking, wealth management, and prime brokerage clearing services.

Following a March 14, 2008 announcement that the firm required emergency financing from the Federal Reserve Bank of New York and JPMorgan Chase in order to avoid insolvency, Bear Stearns suffered a huge decline in value with its market capitalization dropping by 47%. On March 16, the firm agreed to be acquired by JPMorgan Chase for $236 million (approximately $2 per share, down from Friday, March 14 close of $30 a share). Among Bear Stearns' assets most desired by JPMorgan are its prime brokerage unit and the firm's midtown Manhattan office tower.

From 2005 through 2007, Bear Stearns was recognized as the "Most Admired" securities firm in Fortune’s "America's Most Admired Companies" survey, and second overall in the security firm section.

On March 14, 2008, the Associated Press reported that JPMorgan Chase, in conjunction with the Federal Reserve Bank of New York, would provide temporary funding to Bears Stearns because "its liquidity significantly deteriorated over the past day and the temporary funding will help it continue operating normally." The article further quoted Bear Stearns as indicating "there is no guarantee any permanent strategic alternatives will be successful." JPMorgan Chase will provide funding as necessary for up to 28 days and will also assist Bear Stearns in finding permanent financing.

Market reaction to the arrangement with JPMorgan Chase was extremely negative with Bear Stearns stock down more than 91% over the next two trading sessions. This led some market observers to question whether Bear Stearns could remain an independent bank. Standard & Poor's lowered the counterparty risk rating of Bear Stearns three notches to "BBB" from "A" and warned that other cuts may be warranted. While S&P expected Bear Stearns will solve its funding problems, they warned, "...we consider it [the arrangement with JPMorgan Chase] a short term solution to a longer term issue that does not entirely affect Bear's confidence crisis."

On March 16, 2008, JP Morgan Chase Bank announced plans to purchase the troubled organization for approximately $2 per share or approximately $240 million. The exact terms of the transaction are JPMorgan Chase will exchange 0.05473 shares of its stock for each share of Bear Stearns. To illustrate the severity of Bear's financial condition, the sale price is only 2.4% of the bank's book value and only 1% of its market value only 16 days prior to the sale. The real estate value of the bank's Manhattan headquarters alone is about $1.2 billion. This implies that some of Bear's businesses are worthless or generate outsized losses.

Additionally, in a rare move, the Federal Reserve agreed to fund up to $30 billion of Bear's less liquid assets. It is thought that there will be mass layoffs at Bear Stearns entities.The transaction is a fast-track deal, that has already received the approval of both boards. JPMorgan is expected to close its purchase by the end of June 2008, pending shareholder approval.

This action by JPMorgan Chase further underscores the magnitude and severity of the credit crisis in the United States. David Goldman, former head of debt research at Bank of America, stated that "for Bear's stock price to go to effectively zero, contrary to market expectations, tells us that something is systemically very wrong and we're at a very dangerous moment