JPMorgan Chase appears close to closing the deal [1] to acquire Bear Stearns. The arrangement, just 2 days after Bear Stearns stock price dropped 46% in a single trading session, would value the teetering financial services company at about $236 million ($2 per share). The closing price on Bear Stearns stock was $30.85 on Friday. From Reuters:
“The fact that the Bear Stearn’s board is letting these assets go at such a deep discount brings into question the value of assets on a lot of corporate balance sheets,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York. “The main concern is what other financial institutions are worth in the current environment, given the discount that JP Morgan is acquiring Bear at.”
It has not yet been disclosed what involvement the Federal Government will play in this deal, although there was talk Friday about a possible Federal bailout for Bear Stearns. Today Bernanke announced [2] that the Fed will lower the Discount Rate from 3.5 to 3.25, and will open the a new lending facility to allow primary dealers (like Bear Stearns) to borrow directly a the window. Previously, Bear Stearns did not have this kind of access because the window was only open to deposit-accepting banks.
Although the Fed’s new policy is not a direct bailout to Bear Stearns, it certainly helps. It will be interesting to see how much risk we (the taxpayers) will end up taking on to help keep Bear Stearns and JPMorgan Chase operational.
The Wall Street Journal shared an opinion in Saturday’s print edition (electronic copy here [3]), voice a position that advocates market discipline (without which, we really don’t have free markets) as a means to allow failures to work themselves out, and yet acknowledges the implications of allowing Bear Stearns to fail would have significant impacts on its partners (a comment also ringing in the Reuters articles above). Without a doubt, the entire economic landscape is in a tenuous position right now, and this kind of action on the part of the Fed is critical to slowing down the tide of investor nervousness. Investors are already watching the liquidity and value of other financial companies (note Grhiskey’s comments above)… the coming week will be a challenge for those companies.
So, it’s good that there is appropriate action to stem the immediate tide, but there is something wrong when we have this kind of vulnerability within the market and large institutions (Bear Stearns is the #5 investment bank). There is a growing need to find ways to limit the potential domino impact of the failing of a bank like Bear Stearns… I can buy into the current action, but it seems necessary to better manage the risks that other companies are taking in their dependency on each other if the market and Fed are obliged to prop up a failing company in order to prevent economic disaster. And perhaps the ease with which so many customers could abandon the bank is a factor as well, although the specifics of the account structures and responsibility of both the company and the Fed in accommodating the customers is not clear to me.
It is deeply concerning that managing the current economic situation is taking so much apparent reaction to solve. I struggle with thinking that we can’t tolerate market setbacks, almost as if the world of business, particularly financial and retail, has created a new type of entitlement. There must be a practical way to manage through short term economic pull-backs that occur after consumers have gorged themselves with so many discretionary purchases. Consumers have overeaten badly and now seek to lose some the weight they’ve taken on, so inevitably they stop buying so much. This may be pretty dramatic to many people, and there are surely a number of other factors I don’t see or understand well, but the core fuel of our economy is consumer buying, and that being mainly in the non-necessities. We’ve just been through probably the biggest spurt of technological gadget building and buying we may ever see in our lives, and I think we can expect that consumers have had their fill and are going to settle back into a less torrid pattern of buying for a while… perhaps for good.
The real problem seems to be the expectations of investors. We may need to rethink our overall model and expectations, especially in luxury, technology, travel, and financial industries.
Not being any kind of expert in all of this, I sure would like to hear what others know or think.