Bear Raid Rocks the Markets

JP Morgan Chase's stunning $2-a-share purchase of Bear Stearns, along with Fed moves, signal a week of worry ahead for corporate executives.
Stephen TaubMarch 17, 2008

Wall Street and Corporate America awoke Monday in a jittery and apprehensive mood to analysis of JPMorgan Chase & Co.’s Sunday news that it is acquiring Bear Stearns Companies Inc. for about $2 per share — as close as it comes to an emergency bailout.

In response, the Federal Reserve, which agreed to fund up to $30 billion of Bear Stearns’ less liquid assets, moved quickly to cut its primary credit rate from 3.50 percent to 3.25 percent.

Most experts view this as a down payment on a Fed rate cut of one percent on Tuesday afternoon.

The Fed also authorized the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility is available for business this morning.

It will be in place for at least six months, and may be extended as conditions warrant, the Central Bank said in a press release. “Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities,” it added. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Under its deal, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries. and providing management oversight for its operations. The closing is subject only to shareholder approval. That, however, is expected to be a formality because of the Fed’s involvement.

“JPMorgan Chase stands behind Bear Stearns,” said Jamie Dimon, JPMorgan Chase chairman and CEO. “Bear Stearns’s clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

Today, Standard & Poor’s Ratings Services said it placed the BBB long-term and A-3 short-term counterparty credit ratings for Bear Stearns on CreditWatch, “with developing implications.” The ratings had been on CreditWatch with negative implication since Friday. However, S&P today affirmed its AA-minus long-term and A-1-plus short-term counterparty credit ratings on JPMorgan Chase, with a “stable” outlook.
“The rating actions follow the recent announcement that JPMC has agreed to acquire Bear in an all-stock transaction,” S&P credit analyst Diane Hinton said.

The events over the weekend have wide implications for corporate finance executives and other executives. Will there be a recession? Will layoffs be forced, for example, or will job offers to pending college graduates be rescinded? And the new shocks to the credit markets certainly will impact companies that are looking to borrow, in either the public markets or through banks or private placements.

Further, of course, there are concerns that other major investment banks may be in similarly dire shape. The worries are mounting that some heavily leveraged hedge funds could blow up. Already, several have imploded, including two run by Bear Stearns.

“It is highly probable that the market is assuming that something is very wrong when the Fed feels that it is necessary to cut the discount rate just one day ahead of a scheduled FOMC meeting,” wrote economists at Jyske Bank, according to the Wall Street Journal.

“This goes to show the extent of the credit crisis,” Tom Hougaard, a trader at UK spread-bettor City Index, told the paper. “Bear Stearns is another domino to keel over and now we’re wondering how many more are going to fall.”