No Comments Written by Anthony Truong on March 17, 2008 – 12:54 pm

Fed Acts to Rescue Financial Markets

By EDMUND L. ANDREWS
Published: March 17, 2008

WASHINGTON — Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion credit line to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.

In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.

The moves amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation’s financial markets from what officials feared could be a chain reaction of defaults.

After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.

In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.

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In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed.

Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages. But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed.

In a conference call with reporters, the Federal Reserve chairman, Ben S. Bernanke, said the central bank was moving to provide money to financial institutions that need it.

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JP Morgan Pays $2 a Share for Bear Stearns

By ANDREW ROSS SORKIN
Published: March 17, 2008

In a shocking deal reached on Sunday to save Bear Stearns, JPMorgan Chase agreed to pay a mere $2 a share to buy all of Bear — less than one-tenth the firm’s market price on Friday.

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Reflecting Bear’s dire straits, JPMorgan agreed to pay only about $270 million in stock for the firm, which had run up big losses on investments linked to mortgages.

JPMorgan is buying Bear, which has 14,000 employees, for a third the price at which the smaller firm went public in 1985. Only a year ago, Bear’s shares sold for $170. The sale price includes Bear Stearns’s soaring Madison Avenue headquarters.

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The deal for Bear, done at the behest of the Fed and the Treasury Department, punctuates the stunning downfall of one of Wall Street’s biggest and most storied firms. Bear had weathered the vagaries of the markets for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now afflicting the American economy.

A throwback to a bygone era, Bear Stearns still operated as a cigar-chomping, suspender-wearing culture where taking risks was rewarded. It was a firm that was never considered truly white-shoe, an outsider that defied its mainstream rivals.

When the Federal Reserve helped plan a bailout in 1998 of Long Term Capital Management, the hedge fund, Bear Stearns proudly refused to join the effort. Until recent weeks, Alan “Ace” Greenberg, Bear Stearns’s chairman for more than 20 years and a championship bridge player, still regaled its partners over lengthy lunches about gambling with the firm’s money in its wood-paneled dining room.

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James E. Cayne, Bear Stearns’s former chief executive and one of its largest individual shareholder, will likely walk away with a little more than $13.4 million, the value of his Bear stock holdings, according to James F. Redda & Associates. Those would have been worth $1.2 billion in January 2007, when Bear’s stock was trading at a $171.51. Mr. Cayne has taken home more than $232 million in salary, bonus and other pay between 1993 and 2006, the time period for which there is publicly available data, according to Equilar, an executive compensation research firm.

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After 85 years in business, Bear Stearns Cos, the smallest of the major US investment banks, will be bought out by JP Morgan Chase for $2 a share. Considering Bear Stearns shares closed Friday around $30 a share, JP Morgan is only paying around $270 million for a bank that is capitalised (according to Friday’s closing price) at $4.1 billion. The US Fed Reserve will actually take on around $30 billion of Bear’s exposures, which include its portfolio of sub-prime assets (or should I say, liabilities?).

Another sad story in the unfolding deflationary crash. To think that only a year ago, Bear Stearns was trading at over $170 a share. If a large investment bank can go under, smaller banks and retail banks will have to watch out, as consumers get edgy and may cause a “run” on their deposits.

And to top it all off, the US Fed cut its discount rate by 0.25 percent to 3.25 percent; and it has extended its loan program to US banks from $200 billion to virtually an unlimited amount. Panic, anyone?

They are also widely expected to cut the Fed Funds Rate by at least 0.75 percent on Tuesday; given that the Funds Rate is currently at 3 percent, whilst the yield on the 3 month US T-bill is around 1.8 percent, the Fed has a lot of catching up to do. Maybe a 1 percent cut is required…

P.S: In my previous update, I mentioned the “NASDAQ”; what I was actually quoting was the NASDAQ-100.