JPMorgan Chase buys Bear Stearns for about $2/sh

JPMorgan Chase has announced it is acquiring Bear Stearns for about USD 2 a share in stock.

JPMorgan has said that they will ensure that the stock trades till the deal is completed.

On Friday Bear Stearns had received emergency funding from JPMorgan Chase to stave off liquidity problems arising from the credit crisis.

JPMorgan Chase, in association with the Federal Reserve Bank of New York, will provide a secured loan facility for an initial period of up to 28 days, allowing Bear Stearns to access liquidity as needed.

Bear Stearns also said it is talking with JPMorgan Chase regarding permanent financing or other alternatives. The Board of the Federal Reserve has approved the proposal for such a bailout.

The Bear Stearns stock plunged almost 50 percent after the news of the financing came in.

Excerpts from CNBC-TV18's exclusive interview with James Glassman, Senior Economist at JP Morgan Chase Bank:

Q: What do you see happening on March 18 from the Fed?

A: That is the key question here. The Fed has created a new facility to make temporary funding available for certain class of primary dealers that did not have access before and they lowered the discount rate. The primary dealers are not really using the discount window. So that is why I think the discount rate reduction could be part of a bigger package that they do on Tuesday.

The question for us is are they only going to lower the funds rate by half a point which will mean that the discount rate will have come down by 75 bps and the Fed funds rate by 50 bps. It may be a way of trying to find a compromise between doing something larger and something more moderate.

The market in the wake of all the problems with Bear Stearns last week was thinking that the Fed might have to cut rate 75 bps. So it is very conceivable, we don’t really know the share, but it is very conceivable that tonight’s action could mean that the Fed would like to only cut rates half a point.

The argument for going something smaller rather than bigger is that there is no point in unnerving foreign exchange markets and the problem with being too hasty is it undermines confidence in the dollar which is causing problems of its own and it wasn’t clear that an aggressive Fed rate cut would do a whole lot to restore liquidity in the market anyway.

So that is the key question – what does this mean for Tuesday? Personally I think a half a point rate cut is possible, is likely, even though the market was looking for something bigger and it maybe that obviously for the next day or so will see more commentary coming from the Fed that would give some clarity about this.

Q: Do you see the lending facility being extended beyond the warranted six months?

A: It all depends on the nature, the problem. What they are doing is that there is a small group of banks, dealers that work with the Fed and a third of them cannot get reserves, they are not depository institutions. So this facility they created was really meant to create a way for these non-depository institutions to get reserves from the Fed.

So if it goes beyond six months, it will depend on the situation. If the Fed cannot figure out a way to get liquidity moving and things turnaround in the next six months, they will have to come out with many more things to try and get liquidity moving.

Q: We were talking about how this emergency move is to bolster the liquidity situation. Do you see any impact coming in on the liquidity front?

A: I think it is more of a psychological move, because the truth is that these facilities that they have created, many people may be reluctant to use it if it is seen as a signal that somebody else is having the same problem, Bear Stearns is having because these are the same kinds of facilities that Bear Stearns got, these are the same kinds of loans that Bear Stearns got.

So I think it is more an attempt by the Fed to show that it is thinking outside of the box, it is trying many different things. Last week’s announcements earlier in the week was the first really innovative initiative. So it is telling us that they are trying many different ways.

Source : MoneyControl