Bear turns out to be worth just a fraction of its office building

Section:

JPMorgan Buys Bear Stearns at Huge Discount

By Andrew Ross Sorkin
and Landon Thomas
The New York Times
Sunday, March 16, 2008

http://www.nytimes.com/2008/03/16/business/16cnd-bear.html?_r=1&hp&o

Bear Stearns, facing collapse because of the mortgage crisis, agreed Sunday evening to be bought by JPMorgan Chase for a bargain-basement price of less than $250 million, the two companies announced.

The all-stock deal values Bear Stearns at about $2 a share, based on JPMorgan's closing stock price on Friday, the companies said. In contrast, shares of Bear Stearns, which fell $27 on Friday, closed at $30.

A deal for Bear Stearns will end the independence of one of Wall Street's most storied firms and help halt a sweeping panic that set in at the end of last week, causing Bear Stearns' stock to swoon 47 percent on Friday.

JPMorgan said it was guaranteeing the trading obligations of Bear Stearns and its subsidiaries, effective immediately. "JPMorgan Chase stands behind Bear Stearns," Jamie Dimon, JPMorgan's chief executive, said in a statement. "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk."

The talks between the companies, which were overseen by the Federal Reserve and the Treasury Department because of their potential effect on financial markets, were rushed in an effort to reach a deal before stock markets open in Asia at 8 p.m. Eastern time.

The companies' announcement said that the Federal Reserve would provide special financing in connection with the transaction and that the Fed had agreed to fund up to $30 billion of Bear Stearns' "less-liquid assets."

The announcement of a deal came after Bear Stearns' chief executive, Alan D. Schwartz, and other top Bear executives huddled in all-day meetings at the firm's Madison Avenue headquarters, trying desperately to persuade skeptical potential suitors that the firm was worth buying -- even at a price that represents a huge discount to its book value, considered the truest measure of the financial health of a banking institution.

"The past week has been an incredibly difficult time for Bear Stearns," Mr. Schwartz said in the companies' statement. "This transaction represents the best outcome for all of our constituencies based upon the current circumstances."

On Friday, JPMorgan, with the backing of the Federal Reserve Bank of New York, said it would provide financing in order to keep Bear Stearns solvent as lenders and clients rushed to pull their money out.

JPMorgan's bid of $2 a share for Bear Stearns represents a gigantic 97.5 percent discount to the $80 book value that Bear Stearns has reported, reflecting the broad view that the fallout from the credit crunch has permanently devastated Bear's core mortgage operations.

JPMorgan appears to have concluded that the business of one of Wall Street's oldest investment banks is worth far less than the value of the firm's midtown Manhattan skyscraper, which is probably worth at least $1 billion.

Wall Street analysts say the sudden collapse of Bear Stearns is not likely to set off a wave of consolidation in the beleaguered financial services industry. That is because the same fear that has paralyzed the markets has paralyzed buyers.

There is little faith in the assigned or "marked" value of so many assets, including but not limited to mortgage-related securities. In fact, the experience of Bear Stearns proves that it is confidence, not capital, that topples even the savviest financial institutions.

"Once you have a run on the bank you are in a death spiral and your assets become worthless," said David Trone, a brokerage analyst at Fox Pitt Kelton. "If JPMorgan can pull off a rescue, the assets can be saved," he argued. But if not, the assets may lose their value.

Bear Stearns' hedge fund servicing business and its clearing operations have traditionally been profitable operations, though they have suffered in recent months as investors and lenders have lost confidence in Bear.

JPMorgan, the private equity investor J.C. Flowers, and others have been poring through Bear Stearns' books since Friday, with the assistance of Samuel Molinaro, Bear's chief financial officer, and senior members from the firm's bond and mortgage operations.

Throughout much of its history, Bear Stearns has masterfully persuaded the market that its business -- narrowly focused on mortgage finance -- was worth more than it actually was. To some degree this trick has been a testament to the coy gamesmanship of two of its past leaders, Alan "Ace" Greenberg and James E. Cayne.

Both men are devout bridge players, and Mr. Greenberg is an amateur magician to boot, so they are well schooled in the art of not showing their hand. Mr. Cayne's hint eight years back -- that he would sell the firm only for four times its book value -- was even then a flight of financial fancy.

Wall Street investment banks rarely command such a premium to their book value, given the inherent and unpredictable risks of their business. Nevertheless, Mr. Cayne and Mr. Greenberg were adept at spreading the view that Bear Stearns was constantly being pursued by buyers as varied as European commercial banks and even banks like JPMorgan, though it was never clear that any of these talks reached a serious level.

But Bear Stearns' quirky culture and the high pay it awarded its senior executives made it a difficult fit for larger, more staid institutions, and it always seemed that Mr. Greenberg and Mr. Cayne were having too much fun running their business to sell it to an outsider.

Mr. Schwartz, a longtime investment banker whose approach to deal-making is more pragmatic and results-oriented than his predecessor, was forced to race against the clock to seal a deal that salvages any value for shellshocked Bear Stearns employees, who own more than 30 percent of the firm, and its shareholders.

"Banks and brokerages are a house of cards built on the confidence of clients, creditors, and counterparties," Mr. Trone said. "If you take chunks out of that confidence, things can go awry pretty quickly. It could happen to any one of the brokers."

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