JP Morgan buy Bear Stearns, $2 a share, equal to $240 million
Global Market
JPMorgan Chase & Co. surged in New York trading after striking a deal backed by the Federal Reserve to buy Bear Stearns Cos. for $2 a share, 90 percent less than the 85-year old firm's market value last week.
JPMorgan rose $3.86 to $40.44 at while the Amex Securities Broker/Dealer Index fell 10 percent. The bank said it will pay about $240 million for the transaction in which the Fed will guarantee $30 billion of Bear Stearns's less-liquid assets.
JPMorgan bought Bear Stearns for less than the value of its real estate after speculation about a cash shortage, withdrew $17 billion in two days. Faced with the prospect of bankruptcy, Bear Stearns was forced to accept the deal less than five days after he assured investors that the company's liquidity was sufficient to weather credit-market losses. Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14.
The Fed announced minutes later that it had cut the rate on direct loans to banks, moving to stave off a broader market panic with the first emergency weekend action in almost three decades.
Analyst estimated that the breakup value of Bear Stearns was at least $7.7 billion. Even taking into account JPMorgan's estimated $6 billion of merger costs, the price paid for Bear Stearns is a bargain for JPMorgan shareholders.
JPMorgan will give investors 0.05473 shares of its common stock for every share of Bear Stearns they own. Including shares in an employee-incentive plan, the purchase price may reach $270 million. JPMorgan will get funding for the transaction from the Fed.
Bear Stearns, which closed at $30 a share on March 14, traded at $4.88. The company last night cancelled its first-quarter earnings release, which had been scheduled for today.
Without a resolution this weekend, Bear Stearns's situation would have continued to deteriorate when markets resumed trading today. Yet the value placed on the company raised questions about share prices for the rest of Wall Street.
Those failures caused investors to doubt the value of any asset linked to the mortgage market.
The Fed's attempt to rescue Bear Stearns last week with a cash infusion failed to avert a crisis of confidence among the company's customers and shareholders when the emergency funding was announced.
Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan.
JPMorgan said after the sale was announced that the bank was comfortable with the values Bear Stearns had assigned to the mortgage-related assets on its books. JPMorgan was paying about $2 a share for a company with a book of $84 a share, the price reflected the risk the firm was taking.
Minutes after the deal was announced, the Fed cut discount rate to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it.
Bear Stearns's prime brokerage unit generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year.
The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007. About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July during the biggest housing slump in a quarter century.
JPMorgan has posted $3.7 billion of writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc..
When Bear Stearns invited potential buyers for detailed presentations, only JPMorgan and private equity firm J.C. Flowers & Co. showed up. Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn't send representatives.
JPMorgan's participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis. The bank has also profited from its intervention. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.
Stock Market
Most U.S. stocks fell after careening between gains and losses, as investors rewarded JPMorgan Chase & Co. for its $2-a-share buyout of Bear Stearns Cos. and punished other banks on concern they are overvalued.
The Dow Jones Industrial Average recovered from a drop of 194 points to finish higher, led by JPMorgan's biggest gain in almost two months. The Standard & Poor's 500 Index sliding to within 2 percentage points of a bear market, as Lehman Brothers Holdings Inc. and Morgan Stanley tumbled.
The declines followed a selloff across Europe and Asia that pushed the Dow Jones Stoxx 600 Index to its lowest level since 2005 and the MSCI Asia Pacific Index to a third-straight drop.
The S&P 500 lost 11.54 to 1,276.6. The Dow advanced 21.16 to 11,972.25. The Nasdaq Composite Index decreased 35.48 to 2,177.01.
The Fed cut its discount rate on direct loans to commercial banks by 25 basis points to 3.25 percent yesterday, aiming to restore confidence in financial markets. Traders increased bets that the Fed will lower its target rate for overnight loans between banks by at least 1 percentage point tomorrow.
Bear Stearns plunged $25.19 to $4.81 after JPMorgan agreed to buy the securities firm for $240 million or about $2 a share. The Fed is providing financial backing to JPMorgan for the deal. JPMorgan gained $3.77 to $40.31.
The New York Fed agreed to provide Bear Stearns financing through JPMorgan for up to 28 days.
Lehman dropped $7.51 to $31.75. Goldman Sachs dropped $5.84 to $151.02.
UBS AG downgraded shares of Goldman and Lehman to neutral.
Goldman, Morgan Stanley and Lehman may post further write- offs when they report first-quarter results this week. U.S. investment firms and commercial banks are expected to announce additional losses in the first half.
Europe's Dow Jones Stoxx 600 Index sank 4.6 percent. The MSCI Asia Pacific Index tumbled 2.7 percent. Hong Kong's Hang Seng Index lost 5.2 percent. UBS posted its biggest drop, slumping 14 percent in Switzerland.
Morgan Stanley retreated $3.17 to $36.38. Merrill Lynch & Co. dropped $2.33 to $41.18. Citigroup declined $1.16 to $18.62.
National City Corp. and Washington Mutual Inc. tumbled to its lowest on waning prospects for takeovers. Analysts said share declines spurred by losses on home loans have made Washington Mutual and National City takeover targets. The price for Bear Stearns cast doubt on the value of other companies tied to mortgage lending.
National City lost $5.63 to $7.52. Washington Mutual retreated $1.35 to $9.24.
Freeport-McMoRan Copper & Gold Inc. dropped $7 to $94.61 as renewed concern that a U.S. recession will curb global demand for metals.
Energy companies dropped after crude fell $4.53 to $105.68 a barrel. Exxon Mobil Corp. fell 12 cents to $85.79 and Chevron Corp. dropped $1.15 to $84.19.
Ambac Financial Group Inc. tumbled 81 cents to $5.41. FGIC Corp. reported a fourth-quarter net loss of $1.89 billion amid a decline in the value of securities backed by subprime mortgages. MBIA Inc. decreased 14 cents to $10.80.
Industrial production in the U.S. dropped in February. The Federal Reserve said. Production at manufacturers, mines and utilities fell 0.5 percent.
Merck & Co. added 88 cents to $41.85. The company's scientists find a group of genes that act together in networks of people to spur obesity. Johnson & Johnson rose $1.39 to $64.04.
The announcement of more than $18 billion in takeovers failed to halt the market's skid.
CME Group Inc. agreed to acquire Nymex Holdings Inc. for $9.4 billion to add benchmark oil and natural gas futures to the contracts it offers. CME dropped $36.85 to $449.20. Nymex Holdings Inc. tumbled $11.04 to $84.30.
Weyerhaeuser Co. added $1.09 to $63.06. International Paper Co. agreed to buy packaging, recycling and containerboard units from Weyerhaeuser for $6 billion to expand in North America. International Paper dropped $2.79 to $29.47.
Currencies
The dollar may decline against the euro and yen amid speculation the Federal Reserve will cut its interest-rate at least 1 percentage point at a meeting today to spur lending.
The U.S. currency fell to a record low against the euro and Swiss franc after the Fed made an emergency cut in its discount interest-rate. The U.S. currency also fell below 96 yen as traders speculated the Fed will slash its rate to 2 percent or lower to stem a slump in confidence in financial markets.
The dollar traded at $1.5729 per euro. The U.S. currency traded at 97.33 yen. It traded at 0.9844 Swiss franc.
The Australian and New Zealand dollars fell after Bear Stearns Cos. was acquired by JPMorgan Chase & Co. for much less than Bear Stearns value, boosting speculation investors will spurn higher-yielding currencies as financial turmoil deepens. Australia's currency traded at 92.17 U.S. cents. The New Zealand dollar traded at 80.17 U.S. cents.
The British pound dropped against the euro yesterday on concern that credit losses will widen. It touched 79.12 pence.
The dollar recovered some ground as stocks pared losses and as speculation dissipated that the central bank would cut rates in advance of today's meeting.
Volatility implied by one-month dollar-yen options earlier reached 24 percent. Traders quote the gauge of expected swings in exchange rates when pricing options.
The dollar set record lows against the euro every day, when the Fed said it will extend $200 billion of credit to financial institutions in exchange for debt including mortgage-backed securities.
Goldman Sachs Group Inc. and Morgan Stanley strategists say coordinated action by policy makers to curb the dollar's slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates.
The dollar's drop helped shrink the U.S. current account deficit last year. The current account had a $172.9 billion shortfall last quarter, from a revised $177.4 billion gap the prior quarter.
The dollar remained lower after a Fed report showed manufacturing in New York fell to the lowest level on record in March.
A gauge of price momentum suggests the euro may have risen too quickly against the dollar. The euro's relative strength index was at 85 yesterday and has stayed above the 70 level.
The dollar is the weakest since 1971, helping push oil, grains and metals to record highs. That in turn is causing economists to lower growth forecasts for the U.S. and preventing central banks, concerned that inflation is accelerating, from cutting rates, further hurting the dollar.
Commodities
Oil
Crude oil fell more than $4 a barrel as signs that the economy is in recession overcame concern of a weakening dollar.
U.S. industrial production dropped more than forecast in February as the economic slump deepened. The dollar tumbled after the Fed cut rates. A buying orgy in commodities inflated prices and increased risks of a collapse.
Crude oil for April delivery fell $4.53 to settle at $105.68 a barrel. Futures climbed to $111.80 a barrel today.
Brent crude for May settlement declined $4.45 to close at $101.75 a barrel. The contract fell below $100 a barrel.
Hedge-fund managers and other large speculators increased net-long positions and bets on higher prices.
MF Global Ltd. fell as much as 80 percent in New York trading on speculation clients are pulling money and as financial shares dropped to their lowest level in almost five years.
The falling dollar boosted commodity prices until today as investors looked for an inflation hedge. Production at U.S. factories, mines and utilities fell 0.5 percent last month. Factories are cutting back as the biggest housing slump in a generation prompts Americans to spend less on furniture, appliances and automobiles.
U.S. crude-oil inventories in March 14 probably rose 2.3 million barrels. It would be the ninth increase in 10 weeks.
Gasoline for April delivery fell 18.52 cents to $2.5042 a gallon in New York. Futures touched $2.7435 on March 11.
Pump prices have yet to decrease as much as futures. Regular gasoline fell 0.2 cent from a record to $3.283 a gallon.
Gold
Gold pared gains from a rally to a record $1,033.90 an ounce as investors sold the precious metal and commodities to cover losses in other markets.
Stocks plunged worldwide after Bear Stearns Cos. accepted a buyout from JPMorgan Chase & Co. to avoid collapse. MF Global Ltd. fell as much as 80 percent on concern the cash squeeze may spread to other brokerages.
Gold futures for April delivery rose $3.10 to $1,002.60 an ounce.
Silver futures for May delivery dropped 35.5 cents to $20.30 an ounce.
Sugar and coffee plummeted more than 10 percent. Natural gas dropped almost 8 percent, and gasoline tumbled almost 7 percent. Crude oil fell from a record $111.80 a barrel.
The Fed first reduced the so-called discount rate seven months ago from 6.25 percent as losses in the credit market mounted. After today's cut, the rate stands at 3.25 percent.
Policy makers also have reduced the federal-funds rate five times since Sept. 18 from 5.25 percent to 3 percent. Interest-rate futures show a 74 percent chance the Fed will reduce the benchmark overnight-lending rate to 2 percent tomorrow.
JPMorgan Chase & Co. surged in New York trading after striking a deal backed by the Federal Reserve to buy Bear Stearns Cos. for $2 a share, 90 percent less than the 85-year old firm's market value last week.
JPMorgan rose $3.86 to $40.44 at while the Amex Securities Broker/Dealer Index fell 10 percent. The bank said it will pay about $240 million for the transaction in which the Fed will guarantee $30 billion of Bear Stearns's less-liquid assets.
JPMorgan bought Bear Stearns for less than the value of its real estate after speculation about a cash shortage, withdrew $17 billion in two days. Faced with the prospect of bankruptcy, Bear Stearns was forced to accept the deal less than five days after he assured investors that the company's liquidity was sufficient to weather credit-market losses. Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14.
The Fed announced minutes later that it had cut the rate on direct loans to banks, moving to stave off a broader market panic with the first emergency weekend action in almost three decades.
Analyst estimated that the breakup value of Bear Stearns was at least $7.7 billion. Even taking into account JPMorgan's estimated $6 billion of merger costs, the price paid for Bear Stearns is a bargain for JPMorgan shareholders.
JPMorgan will give investors 0.05473 shares of its common stock for every share of Bear Stearns they own. Including shares in an employee-incentive plan, the purchase price may reach $270 million. JPMorgan will get funding for the transaction from the Fed.
Bear Stearns, which closed at $30 a share on March 14, traded at $4.88. The company last night cancelled its first-quarter earnings release, which had been scheduled for today.
Without a resolution this weekend, Bear Stearns's situation would have continued to deteriorate when markets resumed trading today. Yet the value placed on the company raised questions about share prices for the rest of Wall Street.
Those failures caused investors to doubt the value of any asset linked to the mortgage market.
The Fed's attempt to rescue Bear Stearns last week with a cash infusion failed to avert a crisis of confidence among the company's customers and shareholders when the emergency funding was announced.
Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan.
JPMorgan said after the sale was announced that the bank was comfortable with the values Bear Stearns had assigned to the mortgage-related assets on its books. JPMorgan was paying about $2 a share for a company with a book of $84 a share, the price reflected the risk the firm was taking.
Minutes after the deal was announced, the Fed cut discount rate to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it.
Bear Stearns's prime brokerage unit generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year.
The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007. About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July during the biggest housing slump in a quarter century.
JPMorgan has posted $3.7 billion of writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc..
When Bear Stearns invited potential buyers for detailed presentations, only JPMorgan and private equity firm J.C. Flowers & Co. showed up. Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn't send representatives.
JPMorgan's participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis. The bank has also profited from its intervention. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.
Stock Market
Most U.S. stocks fell after careening between gains and losses, as investors rewarded JPMorgan Chase & Co. for its $2-a-share buyout of Bear Stearns Cos. and punished other banks on concern they are overvalued.
The Dow Jones Industrial Average recovered from a drop of 194 points to finish higher, led by JPMorgan's biggest gain in almost two months. The Standard & Poor's 500 Index sliding to within 2 percentage points of a bear market, as Lehman Brothers Holdings Inc. and Morgan Stanley tumbled.
The declines followed a selloff across Europe and Asia that pushed the Dow Jones Stoxx 600 Index to its lowest level since 2005 and the MSCI Asia Pacific Index to a third-straight drop.
The S&P 500 lost 11.54 to 1,276.6. The Dow advanced 21.16 to 11,972.25. The Nasdaq Composite Index decreased 35.48 to 2,177.01.
The Fed cut its discount rate on direct loans to commercial banks by 25 basis points to 3.25 percent yesterday, aiming to restore confidence in financial markets. Traders increased bets that the Fed will lower its target rate for overnight loans between banks by at least 1 percentage point tomorrow.
Bear Stearns plunged $25.19 to $4.81 after JPMorgan agreed to buy the securities firm for $240 million or about $2 a share. The Fed is providing financial backing to JPMorgan for the deal. JPMorgan gained $3.77 to $40.31.
The New York Fed agreed to provide Bear Stearns financing through JPMorgan for up to 28 days.
Lehman dropped $7.51 to $31.75. Goldman Sachs dropped $5.84 to $151.02.
UBS AG downgraded shares of Goldman and Lehman to neutral.
Goldman, Morgan Stanley and Lehman may post further write- offs when they report first-quarter results this week. U.S. investment firms and commercial banks are expected to announce additional losses in the first half.
Europe's Dow Jones Stoxx 600 Index sank 4.6 percent. The MSCI Asia Pacific Index tumbled 2.7 percent. Hong Kong's Hang Seng Index lost 5.2 percent. UBS posted its biggest drop, slumping 14 percent in Switzerland.
Morgan Stanley retreated $3.17 to $36.38. Merrill Lynch & Co. dropped $2.33 to $41.18. Citigroup declined $1.16 to $18.62.
National City Corp. and Washington Mutual Inc. tumbled to its lowest on waning prospects for takeovers. Analysts said share declines spurred by losses on home loans have made Washington Mutual and National City takeover targets. The price for Bear Stearns cast doubt on the value of other companies tied to mortgage lending.
National City lost $5.63 to $7.52. Washington Mutual retreated $1.35 to $9.24.
Freeport-McMoRan Copper & Gold Inc. dropped $7 to $94.61 as renewed concern that a U.S. recession will curb global demand for metals.
Energy companies dropped after crude fell $4.53 to $105.68 a barrel. Exxon Mobil Corp. fell 12 cents to $85.79 and Chevron Corp. dropped $1.15 to $84.19.
Ambac Financial Group Inc. tumbled 81 cents to $5.41. FGIC Corp. reported a fourth-quarter net loss of $1.89 billion amid a decline in the value of securities backed by subprime mortgages. MBIA Inc. decreased 14 cents to $10.80.
Industrial production in the U.S. dropped in February. The Federal Reserve said. Production at manufacturers, mines and utilities fell 0.5 percent.
Merck & Co. added 88 cents to $41.85. The company's scientists find a group of genes that act together in networks of people to spur obesity. Johnson & Johnson rose $1.39 to $64.04.
The announcement of more than $18 billion in takeovers failed to halt the market's skid.
CME Group Inc. agreed to acquire Nymex Holdings Inc. for $9.4 billion to add benchmark oil and natural gas futures to the contracts it offers. CME dropped $36.85 to $449.20. Nymex Holdings Inc. tumbled $11.04 to $84.30.
Weyerhaeuser Co. added $1.09 to $63.06. International Paper Co. agreed to buy packaging, recycling and containerboard units from Weyerhaeuser for $6 billion to expand in North America. International Paper dropped $2.79 to $29.47.
Currencies
The dollar may decline against the euro and yen amid speculation the Federal Reserve will cut its interest-rate at least 1 percentage point at a meeting today to spur lending.
The U.S. currency fell to a record low against the euro and Swiss franc after the Fed made an emergency cut in its discount interest-rate. The U.S. currency also fell below 96 yen as traders speculated the Fed will slash its rate to 2 percent or lower to stem a slump in confidence in financial markets.
The dollar traded at $1.5729 per euro. The U.S. currency traded at 97.33 yen. It traded at 0.9844 Swiss franc.
The Australian and New Zealand dollars fell after Bear Stearns Cos. was acquired by JPMorgan Chase & Co. for much less than Bear Stearns value, boosting speculation investors will spurn higher-yielding currencies as financial turmoil deepens. Australia's currency traded at 92.17 U.S. cents. The New Zealand dollar traded at 80.17 U.S. cents.
The British pound dropped against the euro yesterday on concern that credit losses will widen. It touched 79.12 pence.
The dollar recovered some ground as stocks pared losses and as speculation dissipated that the central bank would cut rates in advance of today's meeting.
Volatility implied by one-month dollar-yen options earlier reached 24 percent. Traders quote the gauge of expected swings in exchange rates when pricing options.
The dollar set record lows against the euro every day, when the Fed said it will extend $200 billion of credit to financial institutions in exchange for debt including mortgage-backed securities.
Goldman Sachs Group Inc. and Morgan Stanley strategists say coordinated action by policy makers to curb the dollar's slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates.
The dollar's drop helped shrink the U.S. current account deficit last year. The current account had a $172.9 billion shortfall last quarter, from a revised $177.4 billion gap the prior quarter.
The dollar remained lower after a Fed report showed manufacturing in New York fell to the lowest level on record in March.
A gauge of price momentum suggests the euro may have risen too quickly against the dollar. The euro's relative strength index was at 85 yesterday and has stayed above the 70 level.
The dollar is the weakest since 1971, helping push oil, grains and metals to record highs. That in turn is causing economists to lower growth forecasts for the U.S. and preventing central banks, concerned that inflation is accelerating, from cutting rates, further hurting the dollar.
Commodities
Oil
Crude oil fell more than $4 a barrel as signs that the economy is in recession overcame concern of a weakening dollar.
U.S. industrial production dropped more than forecast in February as the economic slump deepened. The dollar tumbled after the Fed cut rates. A buying orgy in commodities inflated prices and increased risks of a collapse.
Crude oil for April delivery fell $4.53 to settle at $105.68 a barrel. Futures climbed to $111.80 a barrel today.
Brent crude for May settlement declined $4.45 to close at $101.75 a barrel. The contract fell below $100 a barrel.
Hedge-fund managers and other large speculators increased net-long positions and bets on higher prices.
MF Global Ltd. fell as much as 80 percent in New York trading on speculation clients are pulling money and as financial shares dropped to their lowest level in almost five years.
The falling dollar boosted commodity prices until today as investors looked for an inflation hedge. Production at U.S. factories, mines and utilities fell 0.5 percent last month. Factories are cutting back as the biggest housing slump in a generation prompts Americans to spend less on furniture, appliances and automobiles.
U.S. crude-oil inventories in March 14 probably rose 2.3 million barrels. It would be the ninth increase in 10 weeks.
Gasoline for April delivery fell 18.52 cents to $2.5042 a gallon in New York. Futures touched $2.7435 on March 11.
Pump prices have yet to decrease as much as futures. Regular gasoline fell 0.2 cent from a record to $3.283 a gallon.
Gold
Gold pared gains from a rally to a record $1,033.90 an ounce as investors sold the precious metal and commodities to cover losses in other markets.
Stocks plunged worldwide after Bear Stearns Cos. accepted a buyout from JPMorgan Chase & Co. to avoid collapse. MF Global Ltd. fell as much as 80 percent on concern the cash squeeze may spread to other brokerages.
Gold futures for April delivery rose $3.10 to $1,002.60 an ounce.
Silver futures for May delivery dropped 35.5 cents to $20.30 an ounce.
Sugar and coffee plummeted more than 10 percent. Natural gas dropped almost 8 percent, and gasoline tumbled almost 7 percent. Crude oil fell from a record $111.80 a barrel.
The Fed first reduced the so-called discount rate seven months ago from 6.25 percent as losses in the credit market mounted. After today's cut, the rate stands at 3.25 percent.
Policy makers also have reduced the federal-funds rate five times since Sept. 18 from 5.25 percent to 3 percent. Interest-rate futures show a 74 percent chance the Fed will reduce the benchmark overnight-lending rate to 2 percent tomorrow.
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