JP Morgan Chase will acquire Bear Stearns for $2 per share or $236 million. This compared to a $6.73 billion value last week and a $18.7 billion value last year. Their New York headquarters building alone is worth $1.2 billion. This speaks to the ongoing crisis of confidence in credit markets, and it’s already caused Asian indices to open down 3-5%.
The takeover comes after Friday’s news that Bear Stearns was to use JP Morgan Chase’s access to the Fed’s Discount Window for a 28-day loan to help liquidity. Normally only Fed-affiliated money center banks like JP Morgan Chase and other global players can access the Discount Window, and normally Discount Window loans are overnight. After credit markets got rocky in August, the Fed extended the Discount Window loans to 28 days. Now that things have gotten worse in recent weeks, the Fed will now allow investment banks to access the Discount Window; Discount Window loans will now be for 6 months; and the Fed lowered the Discount Rate from 3.5% to 3.25%. This was all ahead of the Fed’s Tuesday FOMC meeting, where they are expected to lower even more … after they see how markets play Monday.
Last week the Fed also said that, through it’s Term Auction Facility (TAF), it will trade AAA securities that banks can’t unload for Treasuries for 28 days. As we understand it (but we’re not sure we have this right), the terms of the Bear Stearns buyout was that the Fed would also back JP Morgan Chase by assuming as much as $30 billion of securities Bear Stearns otherwise might have pushed through the TAF. If this is true, JP Morgan Chase gets Bear for dirt cheap, and the Fed trades Treasuries for the illiquid paper on Bear’s books, so they bear the real risk in hopes that by saving Bear, it doesn’t trigger a broader market freefall.
- Can the Fed afford to provide all this market support? Here’s some information on the Fed’s financial position.
- Besides lowering the bank-to-bank Fed Funds Rate and the Fed-to-bank Discount rate, the Fed has also been actively using the Term Auction Facility (TAF). Here’s a good explanation of the TAF vs Discount Window.