After Bear Stearns Rescue, Who's Next?

By JOE BEL BRUNO and MADLEN READ
The Associated PressMonday, March 17, 2008; 1:00 PM

NEW YORK -- With a deal in place to save Bear Stearns from bankruptcy, the company's shares traded above the offer price Monday even as investors began turning a critical eye to other investment banks amid worries about how far the credit contagion could spread.

Despite the weekend agreement for JPMorgan Chase & Co. to buy Bear Stearns for a fraction of its value last week, worries that other banks had sizable exposure to troubled credit markets sent global markets tumbling.

The uncertainty was evident on Wall Street, where the Dow Jones industrials fell nearly 200 points early on, climbed back into positive territory and then sank again by more than 100 points.

A complete collapse of Bear Stearns might have completely crushed the already-dwindling confidence in the global financial system, which has frozen up after last year's collapse of the subprime mortgage market.

Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse. But the fact that a major investment bank could reach the verge of buckling _ and be sold at such a discount _ sent dismay through Wall Street and beyond.

"One reaction is shock that a company that reaffirmed its book value at around $84 on Wednesday can be worth $2 per share four days later on Sunday," said Deutsche Bank analyst Mike Mayo.

The financial industry wants to know exactly how badly Bear Stearns bet on mortgage-backed investments. Unwinding the nation's fifth-biggest investment houses should provide some insight into what other financial institutions might have on their books.

With Bear Stearns seemingly gone, investors pondered who might be next. Lehman Brothers Holding Inc. stock fell more than 29 percent Monday, following a 15 percent drop on Friday amid concerns it might be facing similar liquidity issues. Lehman Chief Executive Richard Fuld denied Monday that the firm was having such problems.

Bear Stearns shares fell $26.32, or 87.7 percent, to $3.68 _ above the shockingly low price of $2 per share that JPMorgan Chase is paying _ while JPMorgan rose $3.15, or 8.6 percent, to $39.69. UBS AG, hit hard by the same type of write-downs for mortgages that felled Bear Stearns, dropped nearly 12 percent in Zurich.

JPMorgan announced Sunday night that it would acquire Bear Stearns for $236.2 million in a deal that was fast-tracked by the federal government to avoid a bankruptcy. The price represents roughly 1 percent of what the investment bank was worth just 16 days ago.

The Federal Reserve and the U.S. government swiftly approved the all-stock buyout to complete the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.

"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we're probably heading into a recession."

JPMorgan said it will guarantee all business _ such as trading and investment banking _ until Bear Stearns' shareholders approve the deal, expected to be completed during the second quarter. The acquisition includes Bear Stearns' midtown Manhattan headquarters.

JPMorgan Chief Financial Officer Michael Cavanagh did not say what would happen to Bear Stearns' 14,000 employees worldwide, or whether the 85-year-old Bear Stearns name would live on after surviving the Great Depression and a slew of recessions. He told analysts and investors on a conference call that JPMorgan was most interested in buying Bear Stearns' prime brokerage business, which completes trades for big investors such as hedge funds.

At almost the same time as that deal was announced, the Fed said it approved a cut in its lending rate to banks to 3.25 percent from 3.50 percent and created another lending facility for big investment banks. The central bank's official meeting is Tuesday. Before the emergency move to lower the discount rate _ the rate at which banks lend each other money _ the Fed was widely expected to again cut its headline rate by as much as a full point to 2 percent.

Wall Street analysts say the rescue bid was more than just saving one of the world's largest investments banks _ it was a prop for the U.S. economy and the global financial system. An outright failure would cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.

After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government's guarantee that JPMorgan would not suffer any losses on the deal.

"The past week has been an incredibly difficult time for Bear Stearns," Bear Stearns Chief Executive Alan Schwartz said in a statement. "This represents the best outcome for all of our constituencies based upon the current circumstances."
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AP Business Writers Jeannine Aversa in Washington and Stephen Bernard in New York contributed to this report.
© 2008 The Associated Press