After a weekend of frantic cappuccino-fuelled negotiations on Wall Street, ailing US investment bank Bear Stearns has agreed to a $240m buyout/ bail-out offer from rival JP Morgan Chase. As falls from grace go, that’s pretty spectacular – JP Morgan will pay a measly $2 per share to buy a bank that was trading at more than $60 a share this time last week. So it’s contrived to lose 97% of its value in seven days – and since Bear’s office building on Wall Street is worth about $1bn, its shareholders are basically paying JP Morgan to take the bank off their hands. Ouch.
Bear had spent the last week being dogged by rumours that it was about to run out of money – and in the banking world, this can often become a self-fulfilling prophecy. Clients rushed to withdraw their funds, and soon the bank was rapidly heading for insolvency. On Friday, it admitted that it had been forced to seek $30bn in emergency funding from rival JP Morgan, with the backing of the US Federal Reserve – but this clearly wasn’t going to stop the rot. To prevent an exodus of Asian investors this morning, Bear was forced to agree to the knock-down price over the weekend.
The deal basically amounts to a bail-out by the Fed, which has also agreed to guarantee $30bn of Bear’s less-liquid assets (to prevent a fire sale). In addition to the emergency funding, it’s also slashed its lending rate and offered banks another facility to get their hands on short-term loans, in a bid to get the market moving again. Drastic measures – but it shows how desperate the Fed is to prevent the collapse of Bear Stearns, in case it takes the entire US banking system down with it.
Not that this will be much consolation to Bear’s shareholders, who’ve seen the bank lose about $18bn in value in the last year. One of the biggest losers will be British financier Joe Lewis, who’s reportedly been left £800m out of pocket – even if you’re a multi-zillionaire, that’s going to sting a bit (the papers are speculating that he’s going to have to start selling up elsewhere to raise some cash). Bear’s employees will also be miserable – many of them are likely to get the boot under the new regime.
And they’re not the only ones in a panic. The Wall Street woe has sent shockwaves around the world, with markets tumbling all over the place. The FTSE is already down over 100 points, with bank shares particularly hard hit – the likes of HBOS, RBS and Alliance & Leicester have all got a hammering this morning.
What’s more, there could be worse to come – rumours are rife that more massive write-downs and more liquidity problems are likely to emerge as the banks report this week. Looks like Easter's cancelled on Wall Street...