NEW YORK - JPMorgan Chase said Sunday it will acquire crippled rival Bear Stearns for a bargain-basement $236.2 million - or $2 a share - a stunning collapse for one of the world's largest and most storied investment banks.
The last-minute buyout was aimed at averting a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system.
The U.S. Federal Reserve and the government swiftly approved the all-stock deal, showing the urgency of completing the deal before world markets opened. Early indications, though, pointed to continued fear about the stability of the U.S. market, as the dollar hit fresh record lows against the Euro, gold broke through $1,015 an ounce and Asian stocks sank.
"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "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."
The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets. Meanwhile, JPMorgan said it will guarantee all business - such as trading and investment banking - until Bear Stearns' shareholders approve the deal, which is expected to be completed during the second quarter.
JPMorgan Chase chief financial officer Michael Cavanaugh did not say what would happen to Bear Stearns' 14,000 employees worldwide or whether the Bear Stearns name would survive. He told analysts and investors on a conference call that JPMorgan was most interested in buying Bear Stearns' prime brokerage business, which completes trades for big investors such as hedge funds.
Risky bets on securities tied to subprime mortgages - loans given to customers with poor credit history - crippled Bear Stearns, the nations' fifth-largest investment bank. So far, global banks have written down some $200 billion worth of securities slammed amid the credit crisis.
At almost the same time as the deal for control of Bear Stearns was announced, the Federal Reserve said it approved a cut in its lending rate to banks to 3.25 per cent from 3.50 per cent and created another lending facility for big investment banks. The central bank's official meeting is on Tuesday. Before the emergency move to lower the discount rate, which is the rate at which banks lend each other money, the Fed was widely expected to again cut its headline rate by as much as a full point to two per cent.
"Having taking Bear Stearns out of the problem category, and the strong action by the Federal Reserve, we would anticipate the market will behave quite differently on Monday than it was Thursday or Friday," Cavanaugh told analysts during a conference call.
Some analysts expected it to be a brutal day for global stocks, nevertheless. Japan's benchmark Nikkei stock index has plunged more than three per cent in morning trading.The Nikkei 225 stock index fell 407.81 points, or 3.33 per cent, to 11,833.79 on the Tokyo Stock Exchange shortly after the market opened Monday.
A collapse of Bear Stearns could have heightened anxiety in world financial markets amid a deepening credit crunch. JPMorgan's acquisition of Bear Stearns represents roughly one per cent of what the investment bank was worth just 16 days ago.
The deal marked a 93.3 per cent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 per cent discount to its book value as of Feb. 29. The company is set to report its first-quarter results after the closing bell on Monday.
Bear Stearns shares closed Friday at $30 a share. At their peak, the shares traded at $159.36.
"The past week has been an incredibly difficult time for Bear Stearns," said Bear Stearns chief executive Alan Schwartz in a statement. "This represents the best outcome for all of our constituencies based upon the current circumstances."
Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world's largest investments bank - it was a prop for the U.S. economy and the global financial system. An outright collapse could cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.
The government, led by the Treasury Department and the Fed, was reported to have closely monitored the talks between JPMorgan and Bear Stearns. Treasury Secretary Henry Paulson, former chief executive of Goldman Sachs Group Inc., "has been in nearly continuous consultations all weekend," said Brookly McLaughlin, a Treasury Department spokeswoman.
After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government's guarantee that JPMorgan would not suffer any losses on the deal.