JPMorgan to Buy Bear, Fed Opens Lending to Wall St

NEW YORK (Reuters)- JPMorgan Chase & Co set a deal to buy stricken rival Bear Stearnsfor a rock-bottom price, while the U.S. Federal Reserve expandedlending to securities firms for the first time since the GreatDepression to prop up the financial system.

The shock news, the biggest sign yet of how devastating the creditcrisis is for Wall Street, slammed the U.S. dollar to a record lowagainst the euro, pummeled Asia stock markets and boosted gold andlow-risk bonds.

The Fed also made an emergency quarter-point cut in its discountrate and agreed to finance up to $30 billion of Bear’s assets as U.S.Treasury Secretary Henry Paulson pledged the U.S. government isprepared to do "what it takes" to maintain the stability of thefinancial system.

"The fear is how many more skeletons in the closet are still therein the global credit markets?" said David Cohen, economist at ActionEconomics in Singapore.

"This is another effort by the Fed to calm things down, but thecloud on the horizon is just how much more of these credit issues arestill out there."

Faced with an economy that may already be mired in recession, theFed is expected to pull another tool out of its box on Tuesday byslashing its key benchmark overnight interest rate by as much as 1-?percent.

It has already cut the rate by a total of 2-? percentage points to 3percent since mid-September — putting downward pressure on the U.S.dollar.

The Fed’s latest moves were seen as an attempt to prevent othersfrom suffering the same fate as Bear, the fifth-largest U.S. investmentbank. Bear in essence faced Wall Street’s version of a run on the bankas customers stopped trading with the firm and demanded their cash latelast week.

On Friday, shares of rival Lehman Brothers were battered on fears itmight lose investor confidence next, though a half-dozen hedge fundsReuters spoke to were trading with Lehman and Lehman insisted it was ingood shape.

Bear’s predicament shows how fast things can change on Wall Street.

JPMorgan is paying just $2 a share for Bear, or a total of $236million, although the bank put a total $6 billion price tag on the dealincluding litigation and severance costs.

Still, the per-share payout is just one-fifteenth of Bear’s stockprice on Friday and miles off its record share price of $172.61 lastyear.

That means Bear’s shareholders, including British billionaire JosephLewis and Bear Stearns’ Chairman Jimmy Cayne, will have their holdingswiped out by the deal.

"It’s scary for what it says about the value of financial assets, ifa company is worth only a small percentage of book value," said EmanuelWeintraub, managing director of Integre Advisors, a New York-basedmoney management firm.

APOCALYPSE NOW

Bear Stearns, which has more than 14,000 employees, tradesinterest-rate swaps, credit default swaps, and other derivatives withdozens of banks globally. If Bear Stearns went bankrupt, its tradingpartners could face big losses and stop lending, paralyzing the globalfinancial system

"It wouldn’t just be Bear’s problem, it would be everyone’sproblem," said Marino Marin, an investment banker at Gruppo, Levey& Co who has restructured banks in the past but is not involved inthis deal. "It would be apocalyptic."

That’s why policymakers moved swiftly on Sunday.

The Fed cut its discount rate to 3.25 percent from 3.5 percent andunveiled a new lending facility at the discount rate for primarydealers — big Wall Street firms with which it deals directly infinancial markets.

"Desperate times need desperate measures. The Federal Reserve isdoing what it takes to restore stability and it means cutting thediscount rate on a Sunday night in the U.S., then so be it," said CraigJames, the chief equities economist at CommSec in Sydney.

Bear Stearns, one of 20 primary dealers, had been unable to borrowdirectly from the window, because it had previously been open only todeposit-accepting banks.

JPMorgan wrapped up the deal in record time. It said the boards ofthe two companies had unanimously approved the deal that gives Bearshareholders 0.05473 shares of JPMorgan Chase for every share.

For JPMorgan and its CEO Jamie Dimon, the deal may turn out to be a rare opportunity, some analysts said.

"JPM is getting the number three prime broker, a solid merchantbanking portfolio, a good high net worth business and a mortgageservicing business for well below its market value. But BSC has nochoice but to sell," said Bernstein Research analyst Brad Hintz.

Dimon is known as a details man, a whiz at numbers and has a trackrecord of fixing up major banks. By working with the authorities torescue a financial institution, he is following a JPMorgan traditionbegun by J.P. Morgan himself in 1907, when he rescued the New YorkStock Exchange and other institutions.

The potential downside: Bear Stearns has hard-to-value mortgagebonds and credit derivatives on its books. It may also face legalliability from soured subprime mortgage bonds and other instruments itsold, analysts said.

CRISIS OF CONFIDENCE

Investors lost confidence in Bear in recent weeks because it is thesmallest of the major investment banks and was known as as anaggressive trader in credit and mortgage markets.

Bear generates a much bigger percentage of its revenue from the U.S.fixed income markets than its competitors, giving it few otherbusinesses to lean on amid the global credit crisis.

Much like to depositors lining up to pull money from bailed-outBritish bank Northern Rock, many traders stopped doing business withBear because they feared the firm might go bust. That drained Bear’scash and made a collapse all the more likely.

Following previous crises, famous firms such as Kidder Peabody,Salomon Brothers and First Boston were forced to seek buyers withrobust balance sheets.

JPMorgan, which will guarantee Bear’s trading obligations andprovide management oversight, expected to close the deal by the end ofthe second quarter as it already got fast-track approvals from the Fedand other federal regulators.

"This deal had to happen, and JPMorgan is the best candidate forthis because their capital position is stronger and their sources offunding are stronger," Weintraub said. "I do think this is the bestpossible scenario for financial markets."

(Reporting by Daniel Wilchins, Joseph A. Giannone and Megan Davies; Editing by Jack Reerink & Kim Coghill)