Q&A: JPMorgan buys Bear Stearns

Last Modified: 17 Mar 2008
By: Channel 4 News

JP Morgan Chase rescues Bear Stearns from bankruptcy. But what does it mean?

Q. What's happened?
A. Bear Stearns was forced on Sunday to sell the investment bank to rival JPMorgan Chase for $2 a share, valuing it at $236.2m. JPMorgan's acquisition of Bear represents one per cent of what the investment bank was worth 16 days ago.

It marked a 93.3 per cent discount to Bear Stearns' market capitalization as of Friday, and a 98.8 per cent discount to its book value as of 29 February. The deal gave Bear a 28-day loan from JPMorgan.

JPMorgan Chase, one of the few big banks relatively unscathed by the sub-prime crisis, said it will guarantee all business until Bear Stearns' shareholders approve the deal, which is expected during the second quarter.

Q. What's the role of the Federal Reserve?
A. The Federal Reserve and the US government swiftly approved the all-stock buyout. The Fed essentially made the takeover risk-free by saying it would guarantee up to $30bn of the troubled mortgage and other assets.

Q. Why has this happened?
A. The sale was a move to avert a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system sparked by the collapse of the sub-prime mortgage market.

Bear Stearns was the most exposed to risky bets on these loans. It is now the first major US bank to be undone by that market's fall.

Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world's largest investments banks - it was a prop for the US economy and the global financial system.

An outright failure would cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.

Q. Is this another Northern Rock?
A. In the Northern Rock case, the Bank of England and the treasury were asked to provide temporary liquidity guarantees last August to give Lloyds TSB the confidence to acquire Northern Rock and its fragile balance sheet.

The UK authorities refused to do so, and wound up having to nationalise the bank instead several months later because the alternative on offer from the private sector was inadequate.

In contrast, the Fed committed emergency funding on Friday in order to give breathing space for a private sector deal to be engineered over the weekend. It then helped push Bear into selling for a knock-down price to JP Morgan and assisted the sale with a $30bn funding guarantee.

Q. What's the fallout of the Bear Stearns crisis?
A. Asian markets were down sharply at midday yesterday, with Japan's benchmark Nikkei stock index and Hong Kong' Hang Seng Index off more than 4 per cent.

The dollar slid 3 per cent against the yen at one point to its lowest since 1995, while the Euro hit a peak against the dollar. Oil jumped to a record near $112 a barrel.

Q. How does this affect the UK?
A. Britain's FTSE 100 was down 2.2 per cent on Monday morning, joining a global stocks slide.

There is also a question mark over job security for Bear Stearns employees in the UK.

Q. What's next?
A. Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners said, "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."