JP Morgan to bet Bear Stearns for $2 a share

BBC:

JPMorgan Chase has said it is to buy Wall Street's fifth-largest investment bank Bear Stearns for $2 a share.

The deal values the ailing bank at about $236m (£116m).

The bank has been at the centre of the US mortgage debt crisis. Its shares fell 46% to $30 (£15) after emergency funding for it was announced on Friday.

The news comes as the Federal Reserve cut its lending rate to banks to 3.25% from 3.50%, and created a new lending facility for big investment banks.

Under the deal, the Federal Reserve will fund up to $30 billion of Bear Stearns's less liquid assets.

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BBC business editor Robert Peston said Bear Stearns was taken to the brink of insolvency last week by a sudden collapse in confidence on the part of its hedge fund clients.

As a result, these clients rushed to withdraw their assets.

The credit crunch was caused because banks became less willing to lend to each other after they suffered large losses on investments linked to the US housing market, and the sub-prime sector in particular.

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It sounds like there was a run on the bank that forced the issue. What is still not clear is how those in charge of risk management at Bear Stearns made such a huge miscalculation. The investment banking business has many creative and intelligent people who work on creating wealth everyday. Some apparently did not focus on the downside of the investment vehicles they were creating. It usually takes leverage to lose the kind of money that would drive a firm like Bear Stearns to the brink.

The NY Times notes that the price paid by Morgan is a 93 percent discount on Bear Stearns closing price last Friday. The Times notes that a year ago the shares were selling for $170.

Lawyers and bankers have been working all weekend to get the deal done before Asian markets open Monday. Apparently the Treasury Department and the Fed were also pushing the deal. The Fed also lowered the discount rate another quarter point on Sunday, and unheard of move to help create liquidity.

The stark difference in the price at which the stock traded on Friday and what the company sold for on Sunday will no doubt inspire the class action lawyers who aren't in prison to spring into action. I am sure the lawyers have constructed an explanation of why the disclosures are so different today than they were last week. It should make for unusually interesting reading in what is normally pretty dry material.

On the political front Larry Kudlow notes:

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Senator Schumer is calling Bush "Herbert Hoover." But Hoover signed protectionist Smoot-Hawley, just as Hillary and Obama are today trying to break up NAFTA. Hoover signed a huge tax increase, just as Hill-Bama are preaching. The Dems are emulating Hoover. Bush is trying to stop it.

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It is funny that no one challenges Schumer's lack of understanding of history and the Great Depression.