Barry Ritholtz on Sunday Night...

He writes:

The Big Picture: You call this a rescue? Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.

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.

This was not a bailout of any sort. What the NY Fed did was allow for an orderly liquidation. The Fed is providing the liquidity for JPM's Bear unwind, guaranteeing a good chunk of the debt: "The central bank also approved the financing of JPMorgan Chase & Co.'s purchase of Bear Stearns Cos., including support for as much as $30 billion of Bear's assets." What does THAT mean? "Support for as much as $30 billion of Bear's assets." Who is buying this -- the Fed, or JPM ?

Truly, an amazing development.

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This whole affair raises many more questions than it answers:

• What sort of due diligence did British billionaire Joseph Lewis do prior to picking up 6% of Bear?
• The Fed cut 25 bps Sunday night -- what is THAT gonna do?
• Goldman Sachs Group will announce asset writedowns of about $3 billion this week -- what else is out there in terms of iBank write downs?
• Nikkei off 3.6% in early trading; Dow Futures off 240, S&P 500 down -32.70, NASDAQ down -38.25
• Of all the firms most similar to Bear Stearns, one name keeps coming: Lehman Bros (LEH)

What more will we learn tomorrow?

Comments

[sglover]

Hey, maybe you can tell us again about what a great technician "Maestro" Al Greenspan was?

[christofay]

We are no where near resolution of the New American Depression. Greenspan will be long gone, even his harpy wife will be gone from the village. You can tell when we're near recovery when people say "Greenspan" they'll spit into the gutter. Greensmuck still feels free to talk which means we're still on the downstroke.

Greenspan's reputation was built by Volcker. Volcker left and didn't feel the need to protect his legacy by constantly speaking publicly because he had a legacy. Greenspan was reputation management central planning.

[Ken Houghton]

In order:

Probably the same amount as CITIC, but without coming to his senses.

It was the Discount Rate only. Since the DR remains a Premium to FedFunds, it should do very little. In reality, it will allow a few more overleveraged, overexposed firms to try to clean up their balance sheet (see LEH, below)

No one wants to know. But at least now it will be an orderly evacuation of the burning building

Transitive, once people realise the DR cut will benefit the market more than the BSC fire sale will hurt it.

LEH keeps coming up because its leverage ratio is almost identical to BSC's. That 25 bps wasn't going to save BSC once the liquidity rumors went wild--and it probably won't save LEH by itself--but it might provide a reasonably-priced "bridge loan" to March 27th, when most of the risk can be moved to the t/a/x/p/a/y/e/r/s/ Fed.

If it doesn't, then there really isn't a justification for TSLF, which appears now to have cost two firms their solvency.

[quartz]

It was not a bailout for Bear Sterns, but it appears to be a bailout for the creditors and customers of Bear Sterns.