JP Morgan, Fed To Bail Out Bear Sterns

The New York Times says that JP Morgan and the Fed have reached an agreement to offer Bear Sterns a short-term “financial lifeline.”

Bear Stearns, facing a grave liquidity crisis, reached out to JPMorgan on Friday for a short-term financial lifeline and now faces the prospect of the end of its 85-year run as an independent investment bank.

With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had “agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.”

For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.

The Times speculates that the end may be drawing near for the company as investors scramble to pull their funds.

On Wednesday, Bear’s chief executive, Alan Schwartz, said in an interview on CNBC that his firm had ample liquidity, but his words have not been enough to prevent what seem to be a classic run on the bank.

In a statement issued on Friday, he said: “Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

In other news, if Bear Stearns makes it out alive and is looking for new investment opportunities, I have some AAA rated sacks of garbage outside that I’m interested in selling.

JPMorgan and Fed Move to Bail Out Bear Stearns [NYT]
(Photo:Getty)

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  1. johnarlington says:

    It’s not bailing out…

    It’s more like drilling another hole in the bottom of the boat so the water has a way to get out.

  2. DevPts says:

    Let the investment broker fail. Get it over with already.
    As soon as they sink all the AAA crap they flooded the market with becomes near worthless. Note: They rated their own securities.

    When do the bailouts stop?

    Hey… wait a sec…

    Perhaps the FED will bail me out when I become insolvent (read: owe more than I can ever hope to repay).

  3. RomeoPapaDelta says:

    How about the bankers return their bonuses?

  4. catnapped says:

    C’mon guys…this is just that “free market” at work. Rescuing big business with a liferaft full of money while throwing anchors to everyone else.

  5. ARP says:

    Where are all those pissed off super-capitalists that say we should not provide help to those who are upside down on their mortgages? Or is this the “free market.”

    Let’s see, the Federal Goverment (via JPMC) is offering money at a reduced rate to save them from their own stupidity.

  6. DadCooks says:

    Let them fail!

    Our dollar cannot take much more of the Federal Reserve printing more money to bail out these “institutions”.

    Who is going to bail us, the common folk, out?

  7. As hesitant as I am to participate given the great start this post and thread are off to, I suppose I’ll fight the good fight and factualize this discussion somewhat.

    1.) JP is buying Bear because it’s a good investment; the balance sheet items that Bear can’t keep solvent on their own are irrationally undervalued. JP would not participate unless there was a profit motive. There is nothing anti-capitalist going on here; rather, the return on this investment looks so good that even the socialized Fed can see it.

    2.) The Fed’s temporary loan is not a bailout, as it is underwritten by JP and will be repaid quickly. The Fed has no power to “rope” banks into this, much less target a specific customer for the bank.

    3.) Tell Bear’s employees that this is a bailout. The company will be stripped for assets and most decision-making professionals will lose their jobs, largely due to the actions of a small desk at the firm.

    4.) “Runs on the bank” are, by definition, irrational decisions made in aggregate that are self-fulfilling prophecies. As Keynes said, the market can stay irrational longer than you can stay solvent, and Bear is just the latest victim of that adage.

  8. humphrmi says:

    All on board with what ADismalScience had to say – replace “irrational exuberance” a few years ago when the real estate markets couldn’t fail, with “irrational dearth” now, and we’re about where we were five years ago.

    @DevPts:

    Perhaps the FED will bail me out when I become insolvent (read: owe more than I can ever hope to repay).

    Congratulations! Consumer bailouts from overextended credit have existed for decades, it’s called “bankruptcy” and even with our recent “reform” it’s more liberally applied to consumers than any bank could ever hope to get.

    At least Bear is seeking backing from the private market now. The only thing the Fed is doing is approving the loans. Better than people who signed stupid mortgages walking away or setting their house on fire.

  9. humphrmi says:

    Oh yeah and by the way when the Fed lends money or even guarantees loans they generally make it back in spades, witness the “airline bailout” post 9/11 that made the U.S. government hundreds of millions of dollars simply in loan guarantee fees.

    Folks, seriously, banks are cheap now, cheap means buy. Remember? Buy low? Eh? Bahh? Anyone?

  10. ageshin says:

    Remember the great depression and all those banks going under? Well what we are seeing is the free market forces at work.

  11. humphrmi says:

    HAH! The GREAT depression. By all means, remember the GREAT depression! Nevermind that the depression of ’29 was intially market correction no worse than we saw in 1987 followed by a severe drought that wiped out the farming industry. So let’s see how the “great depression” formed, shall we?

    “The decline in the American economy was the motor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better”

    So in other words, while things sucked here in the U.S., things were either bad or good in the world economy, depending on where your investments stood. So it wasn’t really a “world recession” as many would like to claim.

    “Frantic attempts to shore up the economies of individual nations through protectionist policies, like the 1930 U.S. Smoot-Hawley Tariff Act and retaliatory tariffs in other countries, helped to strangle global trade.”

    So in other words, after our markets got whacked, we tried to protect ourselves by locking out foreign investment, which actually just made everything worse.

    Today, we have a constant flow of foreign investment to ensure market liquidity.

    “The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part of governments to not exacerbate widespread bank failures and the resulting panics and reduction in the money supply.”

    So in other words, un-free markets just made bank failures worse. So in other words, a truly free market economy was never in play during the great depression, it was made worse by government intervention until the government just sat back, spent money as it always had, and let things correct themselves.

  12. ellis-wyatt says:

    How many of you actually think we are ever really going to know the truth, the whole truth and nothing but the truth about this whole banking/mortgage mess? I don’t. As a result, if we survive this disaster, we’ll experience it again down the road. Why? Because so many members of the American public either don’t care to know the truth or because they are afraid to know it. And now that the Fed is officially in the bailout business, it’s never going to stop. Our banking system became nationalized today.

  13. nolatoseatac says:

    I wish nothing but awful things for Bear Stearns and all the terrible pinstriped douchebags they employ.

    Domino effect my ass. Let this company and other poorly-performing businesses fail. Let these people lose what’s most important to them: their pride.

    Justice won’t be served until these mentally and morally bankrupt twats are sleeping on their parents’ couch.

    What will annoy me most is a future “trend piece” from the Times detailing the indignities and lifestyle downgrades of a castrated Wall Street (let’s be real, this article’s already in the works).

    Retarded homeowners don’t get a pass, so why should the banks? When people and businesses make poor investments, they should pay the price.

  14. mikyrok says:

    @ellis-wyatt: no one knows the truth whole truth etc etc about this. The Fed doesn’t know how far it goes, the financial institutions don’t know how far it goes, no one knows. People at these financial institutions are working around the clock trying to figure out exactly how many Mortgage Backed Securities they hold and are also trying to rate how many will fail. They don’t really know the number for each.

  15. sue_me says:

    Let Bear Stearns fail. Let the subprime borrowers foreclose.

    And no, with all this virtual fraud that’s been perpetrated, I’m not touching Wall Street with a 10 foot pole. I work hard for my money and I’m not letting some monkey on Wall Street piss it away.

  16. mac-phisto says:

    @humphrmi: bankruptcy isn’t the fed bailing out consumers. a comparable bailout for consumers would be the refinancing of loans (to even severely delinquent borrowers) thru government-approved lenders on little more than their word that they would repay it.

    the way i see it, you can’t believe a word these idiots say. 2 years ago, they were claiming that they only held top-rated securities. now they say they have plenty of liquidity, but they have america’s largest bank co-signing a loan for them?

    this is eerily familiar to the downfall of a massive energy conglomerate that kept shareholder confidence long enough for insiders to dump their holdings before collapse. the only difference is that every american with a retirement account has bear sterns in there somewhere.

  17. cassandra says:

    Guys. Know your capitalists! The headlines should be Bear STEARNS please. (It’s right in the rest of the story).

    Second, it’s not a bailout. It’s a loan. Bear can’t borrow directly from the Fed because only commercial banks like JP Morgan can do that. So JPM is basically saying to Bear, “Dude, you can borrow my car to get to the Fed.” No one’s really taking any risk here.

    Also, Bear Stearns did not actually get themselves into this. What happened is that all the people who usually trade with Bear and lent them money freaked out that Bear didn’t have enough money to keep going. Bear said it did. The people didn’t believe them. So they pulled away all their financing from Bear. Which then meant that Bear really didn’t have any money.

    Also, this is only a temporary measure. The Fed created a new plan that will take effect next month to allow banks to borrow from it. Bear Stearns fell into trouble before the Fed’s plan kicked in. So that’s why Bear Stearns just needs a temporary loan.

    Also, seriously maybe spare some sympathy for the people who work at Bear Stearns who had nothing to do with this and may be out of a job soon. Seriously nothing to celebrate.

  18. Landru says:

    @ADismalScience: You are wrong.
    JPMC’s (and the Fed’s) only “profit motive” was to stop a domino effect that could bring down many other banking firms. It is indeed a bailout.

    [www.nytimes.com]

  19. AcidReign says:

        I believe JP Morgan is speculating. At some point, these un-payable mortgages will all have to be written off. And my guess is that ultimately, it will be with printed money, courtesy of the Fed. Get ready for some SERIOUS inflation, when it happens…

  20. Landru says:

    @AcidReign:
    Won’t inflation eventually make our cc and student loan debt look like peanuts?

  21. @Landru:

    Landru, the bailout results in the purchase of the company. You can use that terminology until you’re blue in the face, but it’s not appropriate at all for this. This is a purchase. And the fact that so many firms are interested – Keybank, JP, BlackRock, etc. – means that the Fed’s only involvement was likely to negotiate the ordely transfer of assets from this company to another.

    The majority of the cash is being paid by a private company seeking to acquire a rival. Now, instead of quoting an article, please attempt to characterize this as a bailout. Begin.

  22. @AcidReign:

    The ultimate effect of a housing crash is DEflationary. Yes, the Fed selling treasury securities and lowering rates has an inflationary effect, but they’re fighting a SPECULATIVE commodity boom and a FUNDAMENTAL housing crash. Inflation will be a temporary phenomenon unless the irrational preference for those markets proves more persistent than it should be.

  23. cassandra says:

    @ADismalScience: What purchase? What is the Fed purchasing? And what orderly transfer of assets? Nothing’s being bought, and nothing’s being transferred, that I can see. Not until Bear finds a buyer, at least.

    You should read the WSJ’s story on this today if you haven’t already.

  24. @cassandra:

    That’s what I mean. Bear is going to be sold and the temporary financing is strictly to provide short-term solvency until they can be bought by a more capitalized company. Which will happen in short order, trust me – Bear’s balance sheet is actually pretty well-positioned. They got tanked by an ugly rumor and massive client withdrawals.

    The Fed isn’t buying anything – they’re just lending the short-term liquidity at a profit for Americans. Unless, of course, you would have all preferred to make the biggest FDIC payout in history.

  25. mac-phisto says:

    @cassandra: consider for a moment the “bailout” that bank of america provided to countrywide…before purchasing them. that is what ADS is referring to. this is a short-term maneuver that in the end will most likely result in jp morgan owning b.s.

  26. cassandra says:

    @ADismalScience: @mac-phisto: Ah yes, okay, that makes sense.

    I don’t think JPM would want to buy them, though. What would they get? The prime brokerage, maybe. But they’d cut all the traders, all the asset managers, and all the investment bankers because of overlap. (Or yo know, hatred: remember when Bear wouldn’t give JP Morgan back their money on those hedge funds this summer?) Seems like a waste. JPM is well-capitalized, but that’s pretty much all it has going for it in this context.

    If it comes to breakup of Bear, it will be a bankruptcy. There isn’t enough time to do an orderly transfer.

  27. mac-phisto says:

    @cassandra: they’ll do what they always do…keep what compliments their current offerings, sell what they can & dump the rest. what do they get out of it? at the very least, the end of an almost century-long rivalry. they also get to reduce the playing field & keep one of the world’s largest securities traders out of competitor’s hands. does jpm need bs? no. but can they afford to let someone else get them?

  28. @cassandra:

    Yes, the job cuts would probably be deep. Most of the support staff will stick around. But like I said – Bear’s portfolio was well-positioned; JPM would be stealing some badly undervalued assets in the end. That’s why other buyers are knocking down the door. My money is still on BlackRock.

  29. cassandra says:

    @ADismalScience: BlackRock is not a bad idea, but it can’t move without Merrill. And does Merrill need any exposure to Bear?

  30. @cassandra:

    I think Merrill needs some juice. They got caught pants-down, and acquiring a portfolio with some balance isn’t a bad idea. Not sure to what extent their capital crunch would be a problem.

  31. sue_me says:

    @ADismalScience: The FDIC only insures Commercial bank deposits. Since Bear Stearns isn’t a commercial bank, but rather an investment bank, there will be no FDIC payout.

    I say let Bear Stearns go under, and stop the cash handouts, and that’ll be a lesson to the rest of Wall Street not to sell fraudulent securities.

  32. @sue_me:

    Sorry, haven’t studied their business much deeper than the assets – I just assumed they had retail/commercial depository banking subsidiaries or affiliates. Most investment banks do.

  33. sue_me says:

    @ADismalScience: There’s no need to be sorry. It’s a common mistake. Most people don’t even know what the FDIC is, and some of them have worked at banks.

  34. @sue_me:

    At that point, you still have worries with other forms of private insurance that would have to pay out in the event of the destruction of BS. Many of which would probably be destroyed as well.

    The irrational asset panic caused by Bear unwinding their positions to pay creditors is a similar event, akin to a massive insurance payout. In the same way that a consumer doesn’t want a foreclosure down the street, other banks don’t want a major bank to snap illiquid. This purchase is totally justifiable from a capitalist perspective – a failure would indicate an irrational absence of demand for Bear’s assets and further retard market action

  35. cassandra says:

    @ADismalScience: I’m not so sure that Bear’s portfolio actually has balance. They’re heavily weighted on mortgages and don’t seem to be very diversified. They’ve never really strayed from being a wire house. You can get the assets cheap, yes, but remember as a buyer you’re taking on probably civil and criminal liabilities along with them.

  36. @cassandra:

    That’s why BLK is such a good fit. Any house that got really short on mortgages would be really smart to cover now. We all knew default rates would peak in March last August – hump is humped, so hedge out and reboot.

  37. CaliforniaCajun says:

    I’m stupid and spent all my money on worthless shit while telling everyone how great it was. I’m about to lose all my stuff.

    Can I have a government bailout too?

  38. CaliforniaCajun says:

    On a more serious note:

    This is the unregulated “market economy”/”ownership society” you voted for. Twice. Thanks, Bush voters and Greesnspan lovers! Nothing is free, and we’re going to have a hell of a time digging our country out of this mess.

  39. humphrmi says:

    For those of you still following this thread, JP Morgan just bought Bear… for $2 per share.

    [money.cnn.com]

  40. @CaliforniaCajun:

    What are you on about?

    @humphrmi:

    I was amazed at how low the price was. I guess the assets weren’t so hot after all!

  41. cassandra says:

    @ADismalScience:

    But the building is worth $1.4 billion!

    [online.wsj.com]

  42. @cassandra:

    Ugh, that building is going dressed as a cairn for St. Patty’s this year. I should walk through it with a camera tomorrow and sell the tape as “Faces of Death : Banking Careers.” I haven’t seen a fire sale like this in years.

  43. humphrmi says:

    @ADismalScience: I’ve seen the faces of death up close today, my next door neighbor is a futures trader at Bear. She’s pretty shook up. I hope the guys in the trenches survive.

  44. savvy9999 says:

    this whole episode is a mockery of capitalism.

    Anyone who claims ever again that the ‘market is self-correcting’ gets a big fat FAIL. The market is ‘self-protecting’.

  45. EDogII says:

    It seems that banks are more fiscally irresponsible than the average person. Such incompetence…and these guys think they’re hotshots.

  46. YouCanEatMe says:

    Well, corporations might as well enjoy the bailouts for now because the Bush gravy train is coming into the final stop.