Monday, March 17, 2008
12:14 noon - AT A GLANCE: JPMorgan Chase To Buy Bear Stearns For $2/Share
THE NEWS: Investor confidence in the global financial system took yet another beating after JPMorgan Chase & Co. (JPM) agreed to buy Bear Stearns Cos. (BSC) at a massive discount and the Federal Reserve stepped in with an emergency discount rate cut. The Fed seems poised to cut the Fed funds rate by up to 100 basis points Tuesday, even as it took the unprecedented step of guaranteeing loans to Bear. All of this failed to stem a rout of Asian equities and the dollar.
THE DETAILS: The companies' boards have unanimously approved the transaction, which will be a stock-for-stock exchange. JPMorgan Chase will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock. Based on the closing price of March 15, 2008, the transaction would have a value of approximately $2 per share, spelling the end of independence for Bear, founded in 1923.
The move comes after JPMorgan and the Federal Reserve Bank of New York Friday stepped in with emergency funds to keep the beleaguered investment bank afloat.
Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. Other than shareholder approval, the closing is not subject to any material conditions. The transaction is expected to have an expedited close by the end of the calendar second quarter 2008. The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and other federal agencies have given all necessary approvals.
The transaction is expected to be ultimately accretive to JPMorgan Chase's annual earnings.
THE BACKGROUND: Traders and insiders said fears about Bear's precarious position intensified late last week as some banks began demanding additional collateral from the company and refused to engage in credit swaps with the bank. As those rumors spread, clients who had already been nervous about Bear's ability to survive escalated their concerns and began moving business away.
Bear executives had scrambled to reassure clients who were pulling their accounts that it was a victim of false liquidity rumors. Bear CEO Schwartz said the investment bank started last week with sufficient access to cash, but the persistent rumors rattled lenders, clients and counterparties, prompting a run on the bank.
Friday, JPMorgan said it would borrow funds from the Fed's Discount Window and re-lend them to Bear Stearns for 28 days. The borrowings from the Fed will be secured by collateral furnished by Bear Stearns. The Fed, not JPMorgan, is bearing the risk of losses if that collateral falls in value. The size isn't predetermined, but is limited by the available collateral.
The timing of the move made its urgency clear; if Bear could have held out until March 27, it could have borrowed directly from the Fed under a new program, the Term Securities Lending Facility, announced earlier this week.
The involvement of the Fed - coordinating with the Treasury Department and the Securities and Exchange Commission - made clear authorities were concerned about the risks to the broader financial system. The developments demonstrate how quickly an erosion of confidence can undermine a major investment bank amid the current credit crunch.
Bear is the smallest of Wall Street's big five investment banks, but it is a significant player in markets for debt, particularly for securities backed by mortgages.
THE FED CUTS DISCOUNT RATE: The U.S. Federal Reserve Sunday cut the discount rate by 25 basis points to 3.25% and announced a new lending facility designed "to improve the ability of primary dealers to provide financing to participants in securitization markets."
The interest charged in this lending facility will be at the discount rate, according to a statement from the Fed. The discount rate cut means it will only be 25 basis points over the fed-funds rate of 3%.
The Fed also is broadening the type of debt it will accept as collateral in the lending facility. The Fed said such loans can be collateralized by a broad range of investment-grade debt securities.
The Fed said it took the measures "to bolster market liquidity and promote orderly market functioning," according to a statement.
The facility will begin on Monday, March 17 - and the maximum period for such loans will be extended to 90 days from 30 days.
THE MARKETS: Asian share markets are weaker Monday with the U.S. dollar touching record lows against several currencies as markets take little solace from another round of liquidity measures by the Federal Reserve and the planned buyout of Bear Stearns.
The twin announcements provided only a temporary reprieve for markets in Australia and New Zealand, while Japan's stock market opened lower with the Nikkei 225 recently down 2.2% at 11,963.13.
Dow Jones Industrial Average futures were initially 88 points or 0.7% higher in electronic trade on the news, but at around 0020 GMT were quoted down 82 points or 0.7%.
Bear Stearns' recent troubles highlight concerns that the credit crunch has widened and will take a toll not just on financial markets but on the global economy as the year progresses.
In a reflection of the continued risk-averse mood, the Japanese yen has risen strongly against a slew of currencies, while the safe-haven Swiss franc has touched a record high against the U.S. dollar. The euro has hit a fresh record against the dollar, too.
In Asia, everyone "is watching and waiting" to see how things pan out in the U.S., said Waddell Johnston McCarthy adviser Stuart Eaves.
"Until the U.S. trades again, nobody is really going to want to take a punt," he said.
On Friday, Bear Stearns' stock closed down nearly 47%, falling $26.50 a share, to $30.50, after declining as much as 53% during the session. Bear lost about $3 billion of its market capitalization alone Friday. The share price has fallen more than two-thirds in the last three months.
Bear Stearns credit default swaps - protection for Bear bonds against default - now are trading "points upfront," a characteristic of distressed credits. They are quoted at 11 basis points upfront, which means paying $1.1 million upfront and then $500,000 annually for five years for such protection, according to broker Phoenix Partners Group in New York.
U.S. equity markets closed sharply down as investors weighed the wider impact of Bear Stearns' troubles, although a late recovery pulled the major indexes off their session lows. The Dow Jones Industrial Average ended off 194.65 points to 11,951.09; the Nasdaq was down 51.83 to 2,212.49; and the S&P 500 fell 27.34 to 1,288.14.
As Bear Stearns' woes highlighted financial problems that are more U.S.-centric than global, the greenback struck an almost 13-year low against the yen at Y98.89, its lowest mark since September 1995. It also fell to an all-time low against the Swiss franc, dropping below parity to CHF0.9971. While, the dollar came off its lows at the end of the New York session, it still posted losses.
Late Friday, the euro was at $1.5673, up from $1.5613 late Thursday, while the dollar was at Y99.30 compared with Y100.78. The greenback was at CHF0.9991 compared with CHF1.0111 Thursday.
The Bear-inspired flight-to-quality move in U.S. Treasurys sent two- and five-year note yields to lows not seen since 2003. Government securities eventually posted solid gains even after profit-taking set in and stocks moved off their session lows. Late Friday, the two-year note was up 9/32 at 101 1/32 to yield 1.48%, while the 10-year was up 26/32 at 100 28/32 to yield 4.37%. With bonds, yields move inversely to prices.
April fed-funds futures are pricing in about a 58% chance for the Fed to take the drastic step of cutting the funds rate by 100 basis points to 2% at Tuesday's meeting. May fed-funds futures are fully priced for 2% with about a 78% chance for Fed to ease to 1.75% at the April 29-30 meeting.
April crude oil finished down 12 cents to $100.21, apparently largely unshaken by the Bear developments.
Gold futures extended historic highs as the metal functioned as a safe haven and alternative currency while the U.S. dollar continued to weaken amid Bear-fueled credit-market turmoil. The most-active April Comex gold contract rose $5.70 to settle at $999.50 an ounce after extending its contract high to $1,009.
WHAT THEY SAID:
"The financial logic is compelling," said J.P. Morgan Chief Financial Officer Michael Cavanagh on the deal to acquire Bear.
"We haven't signed any formal agreement, we haven't paid any money and we can't guarantee reaching a final agreement in the future," China's Citic Securities said regarding a deal it reached in October to take a 6% stake in Bear Stearns with an investment of $1 billion, while Bear would take a 2% stake in Citic with a $1 billion investment.
The intervention shows Bear "didn't have enough money to turn the lights on this morning," said Carl Lantz, strategist at Credit Suisse. "And in a big picture sense, this isn't that comforting."
"It's just pure fear across the board right now," said Geoffrey Yu, currency analyst at UBS in London. "All the promising news this past week has been undone over this Bear Stearns news."
"Some people think that Bear Stearns may not be the only problem. Other companies may also have issues, too. The fear of uncertainty is what's gripping the market right now," said E. Craig Coats Jr., head of fixed income in New York at Keefe, Bruyette & Woods Inc.
THE DETAILS: The companies' boards have unanimously approved the transaction, which will be a stock-for-stock exchange. JPMorgan Chase will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock. Based on the closing price of March 15, 2008, the transaction would have a value of approximately $2 per share, spelling the end of independence for Bear, founded in 1923.
The move comes after JPMorgan and the Federal Reserve Bank of New York Friday stepped in with emergency funds to keep the beleaguered investment bank afloat.
Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. Other than shareholder approval, the closing is not subject to any material conditions. The transaction is expected to have an expedited close by the end of the calendar second quarter 2008. The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and other federal agencies have given all necessary approvals.
The transaction is expected to be ultimately accretive to JPMorgan Chase's annual earnings.
THE BACKGROUND: Traders and insiders said fears about Bear's precarious position intensified late last week as some banks began demanding additional collateral from the company and refused to engage in credit swaps with the bank. As those rumors spread, clients who had already been nervous about Bear's ability to survive escalated their concerns and began moving business away.
Bear executives had scrambled to reassure clients who were pulling their accounts that it was a victim of false liquidity rumors. Bear CEO Schwartz said the investment bank started last week with sufficient access to cash, but the persistent rumors rattled lenders, clients and counterparties, prompting a run on the bank.
Friday, JPMorgan said it would borrow funds from the Fed's Discount Window and re-lend them to Bear Stearns for 28 days. The borrowings from the Fed will be secured by collateral furnished by Bear Stearns. The Fed, not JPMorgan, is bearing the risk of losses if that collateral falls in value. The size isn't predetermined, but is limited by the available collateral.
The timing of the move made its urgency clear; if Bear could have held out until March 27, it could have borrowed directly from the Fed under a new program, the Term Securities Lending Facility, announced earlier this week.
The involvement of the Fed - coordinating with the Treasury Department and the Securities and Exchange Commission - made clear authorities were concerned about the risks to the broader financial system. The developments demonstrate how quickly an erosion of confidence can undermine a major investment bank amid the current credit crunch.
Bear is the smallest of Wall Street's big five investment banks, but it is a significant player in markets for debt, particularly for securities backed by mortgages.
THE FED CUTS DISCOUNT RATE: The U.S. Federal Reserve Sunday cut the discount rate by 25 basis points to 3.25% and announced a new lending facility designed "to improve the ability of primary dealers to provide financing to participants in securitization markets."
The interest charged in this lending facility will be at the discount rate, according to a statement from the Fed. The discount rate cut means it will only be 25 basis points over the fed-funds rate of 3%.
The Fed also is broadening the type of debt it will accept as collateral in the lending facility. The Fed said such loans can be collateralized by a broad range of investment-grade debt securities.
The Fed said it took the measures "to bolster market liquidity and promote orderly market functioning," according to a statement.
The facility will begin on Monday, March 17 - and the maximum period for such loans will be extended to 90 days from 30 days.
THE MARKETS: Asian share markets are weaker Monday with the U.S. dollar touching record lows against several currencies as markets take little solace from another round of liquidity measures by the Federal Reserve and the planned buyout of Bear Stearns.
The twin announcements provided only a temporary reprieve for markets in Australia and New Zealand, while Japan's stock market opened lower with the Nikkei 225 recently down 2.2% at 11,963.13.
Dow Jones Industrial Average futures were initially 88 points or 0.7% higher in electronic trade on the news, but at around 0020 GMT were quoted down 82 points or 0.7%.
Bear Stearns' recent troubles highlight concerns that the credit crunch has widened and will take a toll not just on financial markets but on the global economy as the year progresses.
In a reflection of the continued risk-averse mood, the Japanese yen has risen strongly against a slew of currencies, while the safe-haven Swiss franc has touched a record high against the U.S. dollar. The euro has hit a fresh record against the dollar, too.
In Asia, everyone "is watching and waiting" to see how things pan out in the U.S., said Waddell Johnston McCarthy adviser Stuart Eaves.
"Until the U.S. trades again, nobody is really going to want to take a punt," he said.
On Friday, Bear Stearns' stock closed down nearly 47%, falling $26.50 a share, to $30.50, after declining as much as 53% during the session. Bear lost about $3 billion of its market capitalization alone Friday. The share price has fallen more than two-thirds in the last three months.
Bear Stearns credit default swaps - protection for Bear bonds against default - now are trading "points upfront," a characteristic of distressed credits. They are quoted at 11 basis points upfront, which means paying $1.1 million upfront and then $500,000 annually for five years for such protection, according to broker Phoenix Partners Group in New York.
U.S. equity markets closed sharply down as investors weighed the wider impact of Bear Stearns' troubles, although a late recovery pulled the major indexes off their session lows. The Dow Jones Industrial Average ended off 194.65 points to 11,951.09; the Nasdaq was down 51.83 to 2,212.49; and the S&P 500 fell 27.34 to 1,288.14.
As Bear Stearns' woes highlighted financial problems that are more U.S.-centric than global, the greenback struck an almost 13-year low against the yen at Y98.89, its lowest mark since September 1995. It also fell to an all-time low against the Swiss franc, dropping below parity to CHF0.9971. While, the dollar came off its lows at the end of the New York session, it still posted losses.
Late Friday, the euro was at $1.5673, up from $1.5613 late Thursday, while the dollar was at Y99.30 compared with Y100.78. The greenback was at CHF0.9991 compared with CHF1.0111 Thursday.
The Bear-inspired flight-to-quality move in U.S. Treasurys sent two- and five-year note yields to lows not seen since 2003. Government securities eventually posted solid gains even after profit-taking set in and stocks moved off their session lows. Late Friday, the two-year note was up 9/32 at 101 1/32 to yield 1.48%, while the 10-year was up 26/32 at 100 28/32 to yield 4.37%. With bonds, yields move inversely to prices.
April fed-funds futures are pricing in about a 58% chance for the Fed to take the drastic step of cutting the funds rate by 100 basis points to 2% at Tuesday's meeting. May fed-funds futures are fully priced for 2% with about a 78% chance for Fed to ease to 1.75% at the April 29-30 meeting.
April crude oil finished down 12 cents to $100.21, apparently largely unshaken by the Bear developments.
Gold futures extended historic highs as the metal functioned as a safe haven and alternative currency while the U.S. dollar continued to weaken amid Bear-fueled credit-market turmoil. The most-active April Comex gold contract rose $5.70 to settle at $999.50 an ounce after extending its contract high to $1,009.
WHAT THEY SAID:
"The financial logic is compelling," said J.P. Morgan Chief Financial Officer Michael Cavanagh on the deal to acquire Bear.
"We haven't signed any formal agreement, we haven't paid any money and we can't guarantee reaching a final agreement in the future," China's Citic Securities said regarding a deal it reached in October to take a 6% stake in Bear Stearns with an investment of $1 billion, while Bear would take a 2% stake in Citic with a $1 billion investment.
The intervention shows Bear "didn't have enough money to turn the lights on this morning," said Carl Lantz, strategist at Credit Suisse. "And in a big picture sense, this isn't that comforting."
"It's just pure fear across the board right now," said Geoffrey Yu, currency analyst at UBS in London. "All the promising news this past week has been undone over this Bear Stearns news."
"Some people think that Bear Stearns may not be the only problem. Other companies may also have issues, too. The fear of uncertainty is what's gripping the market right now," said E. Craig Coats Jr., head of fixed income in New York at Keefe, Bruyette & Woods Inc.
10:59 am - Chart of the Week - Century Logistics
5 L/C and volume is increasing. It has lower high for its bottom.
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