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Yesterday, the first major Wall Street bank fell victim to the effects of the sub-prime crisis. Bear Stearns, one of the top five US investment banks, finally gave up its 85 year independence, threw in the towel and allowed itself to be taken over by JP Morgan Chase. The deal, a share for share transaction at a price of approximately $2 a share and valued at $236M, is a bargain for a Wall Street bank. It is also a far cry from the $169 the shares Bear Stearns hit in January 2007 and even the $30 quoted as little as a week ago.
The JPM Chase deal was also facilitated by the Fed agreeing to fund up to $30 billion of Bear Stearns’ less liquid assets – this is seen as alleviating the need for a fire-sale of mortgage-backed securities. Other than shareholder approval, there are no material conditions and the Fed, the OCC and other regulators have all given their necessary approvals. JPMorgan Chase will guarantee the trading obligations of Bear Stearns and all of its subsidiaries, believed to be considerable.
Bear Stearns had already written down $2 billion in exposure securities and more was expected. The write down was less than other banks, but Bear Stearns, with less capitalisation, was less able to absorb these losses. Goldman’s, Morgan Stanley and Lehmann’s are all expected to write down further amounts this week.
The US move is in sharp contrast to the UK’s Northern Rock situation. Last October, when the problems first surfaced, Lloyds TSB offered to buy Northern Rock but the deal foundered mainly because the UK government would not come up with a deal similar to the Fed’s guarantee. However the Fed’s move has come in for a lot of US criticism as it is seen as government propping up a failed institution. Time will tell who made the right decisions.
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