The U.S. recession is just tip toeing into the financial market scene and already its results are frightening. Last Friday the media was hot with the bail out story of Bear Stearns by JP Morgan Chase due to critical solvency problems. There were also strong rumors that Lehman Brothers was also having financial difficulties. After the working shift was over, everybody went home to spend a nice week end and continue with the financial Wall Street nightmares next Monday. Not quite right. Not everybody.
Bear Stearns’ and JP Morgan’s exec woke up early on Saturday to negotiate yet another multi-million dollar deal. There was a dark cloud hovering over Bear that could splash on them when the financial markets opened on Monday. A bank run was expected early Monday and Bear Stearn had no choice but to declare bankruptcy. They worked tenaciously until late Sunday when finally white smoke came out of the chimney.
JP Morgan Chase announced on Sunday it would acquire troubled Wall Street competitor Bear Stearns for a bargain price of $216.2 million—or $2.00 a share–, less than what you would pay for a Subway cheese sandwich. Shares had closed at $30 on Friday, down 47 percent that day. Shares of Bear Stearns opened last week at $69.75 and traded as high as $159 last year.
The deal was immediately seen as a stunning collapse for one of the world’s largest and most storied investment banks. Bear Stearns has approximately 14,000 employees worldwide.
It’s not clear what the forced sale of Bear to JPMorgan will mean for Bear’s 14,000 employees. JPMorgan didn’t discuss possible layoffs during the conference call Sunday evening. But there’s no doubt the deal will mean the loss of hundreds, possibly thousands, of jobs at Bear. The sale of Bear came as a shock to the firm’s 14,000 employees, who own roughly 30 percent of the company, many of whom count on company stock as their long-term compensation.
The guys upstairs are also taking a licking. Bear’s major shareholders, including British billionaire Joseph Lewis and Bear Stearns’ Chairman Jimmy Cayne, will have their holdings virtually wiped out by the deal, which will see JPMorgan pay only about $2 a share for Bear in JPMorgan stock.
The last-minute buyout was aimed at avoiding a Bear Stearns bankruptcy and spreading crisis of confidence in the global financial system.
The Fed and the U.S. government swiftly approved the all-stock deal, showing the urgency of wrapping up 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.”
A bigger question is how the bailout and forced sale will play on Wall Street. Overnight, the Asian markets sold off sharply and the plunge is continuing in the European markets. U.S. markets are also in for a turbulent day as investors ponder the thought of how a seemingly secure investment bank could evaporate literally overnight. Wall Street now will begin wondering which firm may be next to go the way of Bear Stearns, and many people are pointing fingers at Lehman Brothers.
The quick collapse of Bear is a sober reminder of just how quickly a Wall Street firm can lose the confidence of investors, traders, and other institutions. A week ago, Bear executives were talking about how the firm was poised to report a profitable first quarter, after the firm posted its first quarterly loss in its history in the fourth quarter. But in the span of seven days, Bear went from being Wall Street’s fifth largest firm to another in a long line of investment firms to bite the dust.
Bear Stearns bet too heavily in the mortgage debt market, putting itself behind too many mortgage-backed portfolios and failing to understand the risks involved in them. In so doing, it helped inflate a housing bubble, driven in part by the proliferation of wildly inappropriate subprime mortgages. This brought the financial giant to its knees. So far, global banks have written down some $200 billion worth of securities slammed amid the credit crisis.
This is what I mean when I say we’re seeing “Apocalypse Now” at Wall Street. I wonder what lies ahead.
Oh, one more thing. The photograph above shows a $2.00 bill taped to the revolving door leading to the Bear Stearns global headquarters in New York this morning. It’s a dark humor gesture symbolizing the $2.00 per share paid by JP Morgan to acquire Bear Sterns.
