naked capitalism

Go out to the gym and big news happens. But hopefully this announcement will stop or at least slow the run on Bear.

JP Morgan’s price of $2 a share represents a price of $270 million, or 1/4 the estimated value of Bear’s headquarters building. The discount reflects JPM’s leverage but also the perception that despite all efforts to avoid doing so, the bank will probably wind up eating some liability. (Note the Wall Street Journal reports the total damage at a mere $236 million).

The Bloomberg headline on the main news page also indicates that the Fed is taking a $30 billion first loss position in the deal, but I don’t see any indication in the text of the stories up on either the WSJ or Bloomberg Update: we have confirmation from Greg Ip at the Wall Street Journal:

But, by also agreeing to lend up to $30 billion to J.P. Morgan Chase & Co. to finance illiquid assets inherited from its purchase of Bear Stearns Cos., the Fed is taking on new risks.

With a $13 trillion book of derivatives and no opportunity to do due diligence, there could be some real worms there…..but the End of the World of Finance as We Know It was a fate worth avoiding. Note that JP Morgan agreed to do the deal with no outs. That’s highly unusual, but necessary to stem customer flight. This was a very gutsy move on Dimon’s part. I hope he doesn’t live to regret it.

The Fed also cut the rate at its discount window 25 basis points to 3.25% and extended the maximum term to 90 days. This is significant because it is also the rate on offer at the new term facility, the TSLF.

As of this writing, the yen has gone to 98.1. That’s a bad sign, it indicates further deleveraging is underway. This may merely be due to orders placed for execution on the markets’ open and may reverse considerably as the day progresses. But if it stays at this level or worsens, we are in for a rough ride in the credit markets tomorrow.

From the Wall Street Journal:

The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies’ boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday’s close, Bear Stearns’s stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.

Effective immediately, J.P. Morgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. The deal isn’t subject to any conditions, except shareholder approval. It is expected to close before the end of the second quarter.

There is some brave talk on Bloomberg as to how this move puts a floor under the financials. I don’t buy that at all. Indeed, consider this section of the Journal article:

Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns’s troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.

We are at least a year, perhaps as many as three, away from the bottom of the housing market. We don’t yet know how bad the damage to the financial system or the economy will be. A crisis was averted because a strong player stepped forward. Will JPM be willing or able to do this again? I doubt that a purchase by Chris Flowers would have the same potential to calm the marekts. After JPM, HSBC, and perhaps Buffett (although I can’t imagine him eating this much risk, it’s just not his style), there are not a lot of deep pockets around.

We can take at most one more near train wreck like this. Let’s hope that somehow we manage to avert that fate.

Update 8:50 PM: The yen is now at 96.66. The Nikkei is also down 340, but that is less troubling than the action in the yen. Most commodities that trade now, save gold and silver which are up less than the 3% move in the yen, are down. Deep recession fears may be starting to trouble the commodities bulls.

This is worse than I had thought, and that with a buy in place. Seriously not good if there is no reversion soon.

Update 10:15 PM: The yen has weakened a teeny bit, to 96.95, the NIkkei is down 541, gold and silver are now up over 3%, mirroring the move in the dollar, most energy commodities are up (but not proportional to the dollar fall) ags are mainly down, copper is up a half a percent.