Bear Stearns is clawing to stay alive, with many on Wall Street now betting the storied investment bank may not survive the weekend as an independent shop.
Bear's stock was in a free fall on Mar. 14—hitting an 11-year low—following the news that JPMorgan Chase and the New York Federal Reserve had stepped in with an emergency cash bailout for the New York-based investment firm. The bailout was engineered after days of denials by Bear executives that the firm was facing a liquidity crisis and lacked sufficient funds to continue operating. Bear's stock finished down 47% at 30, on volume that was more than 18 times normal trading. JPMorgan dipped 4% to 36.54.
Bear Stearns CEO Alan Schwartz says the situation at Bear took a turn for the worse during the past 24 hours and the firm's liquidity situation had "significantly deteriorated." In a conference call Friday afternoon, Schwartz says "nervousness in the market" prompted clients and lenders to "get cash out" of the firm.
Schwartz and other top executives at Bear are trying to put on a brave face, saying the firm will be able to weather the current storm. But many on Wall Street, and even some within Bear, aren’t sure.
It's not clear what had changed so dramatically at Bear to necessitate the emergency bailout, in which JPMorgan is providing a secured line of credit to the beleaguered investment firm. But events appear to have moved quickly on Mar. 13. People familiar with the situation say Bear officials called the Fed late in the day, saying the firm had a funding problem. Officials from the Fed were at Bear's spacious offices on Madison Avenue all night, scouring its books and trying to devise a rescue plan. The Fed and Bear then reached out to JPMorgan, seeing if the big bank led by CEO Jamie Dimon could help out. JPMorgan, which has multiple business relationships with Bear, was inclined to do so. But only with some guarantee from the Fed that it would make JPMorgan whole if Bear were to fail and couldn't make good on its obligations. So if Bear fails, everyone in the U.S. will indirectly own a little piece of the company.
It would have been highly risky for other Wall Street firms if Bear Stearns had been allowed to go under because Bear is tightly interconnected with them as both a borrower and a lender. Any firms that are owed a lot of money by Bear would have fallen under suspicion, on grounds that they might not be able to pay their own debts if Bear failed to pay them. That could have triggered a dangerous wave of defaults. The rescue by JPMorgan Chase gives the financial system breathing room to pay off Bear's debts gradually.
Rumors about a funding crisis at Bear had spread like wildfire all week on Wall Street—plummeting the stock in the process. With shares of Bear trading around $30, the stock has lost more than half its value in the past week. It was only a year ago that shares of Bear were trading around $150—just a few dollars below its all-time high.
The Fed apparently contacted JPMorgan because it was in a much better position to come to Bear's aid than other big banks, such as Citigroup, Bank of America, and UBS, all of which are dealing with their own subprime-related woes. Under the terms of the deal, JPMorgan is providing a secured loan to Bear for an initial 28 days. The Fed has agreed to stand behind the loan and to make JPMorgan whole if Bear fails and the collateral it has put up cannot cover the outstanding debt.
The move by JPMorgan to come to Bear's rescue has raised speculation that the big bank may ultimately buy the struggling investment firm. Indeed, a sale of Bear may be the only way it can survive. A source familiar with the situation tells BusinessWeek that Bear executives are now talking to JPMorgan about "exploring strategic initiatives."
Even with the emergency funding, there's little confidence in Bear on Wall Street, especially after the firm's management was out all week denying financial trouble. Once Wall Street loses confidence in a brokerage, it can be a death sentence because other firms are reluctant to lend it money or trade with it. All week there have been rumors about some investment firms being reluctant to trade or lend money to Bear because they were uncertain about its ability to make good on its commitments. In recent days, a number of hedge funds that are prime brokerage clients of Bear have taken steps to move their lucrative business to other Wall Street banks.
Story contributed by BusinessWeek: Read More
Bear's stock was in a free fall on Mar. 14—hitting an 11-year low—following the news that JPMorgan Chase and the New York Federal Reserve had stepped in with an emergency cash bailout for the New York-based investment firm. The bailout was engineered after days of denials by Bear executives that the firm was facing a liquidity crisis and lacked sufficient funds to continue operating. Bear's stock finished down 47% at 30, on volume that was more than 18 times normal trading. JPMorgan dipped 4% to 36.54.
Bear Stearns CEO Alan Schwartz says the situation at Bear took a turn for the worse during the past 24 hours and the firm's liquidity situation had "significantly deteriorated." In a conference call Friday afternoon, Schwartz says "nervousness in the market" prompted clients and lenders to "get cash out" of the firm.
Schwartz and other top executives at Bear are trying to put on a brave face, saying the firm will be able to weather the current storm. But many on Wall Street, and even some within Bear, aren’t sure.
It's not clear what had changed so dramatically at Bear to necessitate the emergency bailout, in which JPMorgan is providing a secured line of credit to the beleaguered investment firm. But events appear to have moved quickly on Mar. 13. People familiar with the situation say Bear officials called the Fed late in the day, saying the firm had a funding problem. Officials from the Fed were at Bear's spacious offices on Madison Avenue all night, scouring its books and trying to devise a rescue plan. The Fed and Bear then reached out to JPMorgan, seeing if the big bank led by CEO Jamie Dimon could help out. JPMorgan, which has multiple business relationships with Bear, was inclined to do so. But only with some guarantee from the Fed that it would make JPMorgan whole if Bear were to fail and couldn't make good on its obligations. So if Bear fails, everyone in the U.S. will indirectly own a little piece of the company.
It would have been highly risky for other Wall Street firms if Bear Stearns had been allowed to go under because Bear is tightly interconnected with them as both a borrower and a lender. Any firms that are owed a lot of money by Bear would have fallen under suspicion, on grounds that they might not be able to pay their own debts if Bear failed to pay them. That could have triggered a dangerous wave of defaults. The rescue by JPMorgan Chase gives the financial system breathing room to pay off Bear's debts gradually.
Rumors about a funding crisis at Bear had spread like wildfire all week on Wall Street—plummeting the stock in the process. With shares of Bear trading around $30, the stock has lost more than half its value in the past week. It was only a year ago that shares of Bear were trading around $150—just a few dollars below its all-time high.
The Fed apparently contacted JPMorgan because it was in a much better position to come to Bear's aid than other big banks, such as Citigroup, Bank of America, and UBS, all of which are dealing with their own subprime-related woes. Under the terms of the deal, JPMorgan is providing a secured loan to Bear for an initial 28 days. The Fed has agreed to stand behind the loan and to make JPMorgan whole if Bear fails and the collateral it has put up cannot cover the outstanding debt.
The move by JPMorgan to come to Bear's rescue has raised speculation that the big bank may ultimately buy the struggling investment firm. Indeed, a sale of Bear may be the only way it can survive. A source familiar with the situation tells BusinessWeek that Bear executives are now talking to JPMorgan about "exploring strategic initiatives."
Even with the emergency funding, there's little confidence in Bear on Wall Street, especially after the firm's management was out all week denying financial trouble. Once Wall Street loses confidence in a brokerage, it can be a death sentence because other firms are reluctant to lend it money or trade with it. All week there have been rumors about some investment firms being reluctant to trade or lend money to Bear because they were uncertain about its ability to make good on its commitments. In recent days, a number of hedge funds that are prime brokerage clients of Bear have taken steps to move their lucrative business to other Wall Street banks.
Story contributed by BusinessWeek: Read More
