Bear Stearns may lose freedom after Federal Reserve bailout

Bear Stearns' 85 years as an independent Wall Street firm may be coming to an end as JPMorgan Chase considers buying the crippled company.

Teetering on the brink of collapse from a lack of cash, New York-based Bear Stearns got emergency funding yesterday from the Federal Reserve and JPMorgan in the largest government bailout of a US securities firm.

The move failed to avert a crisis of confidence among Bear Stearns's customers and shareholders, who drove the stock down a record 47 per cent.

After denying earlier this week that access to capital was at risk, Bear Stearns Chief Executive Officer Alan Schwartz said yesterday that the company's cash position had "significantly deteriorated'' in the past 24 hours. The Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement yesterday.

Now JPMorgan, led by Chief Executive Officer Jamie Dimon, is considering buying Bear Stearns, according to three people briefed on the matter. No agreement has been reached and it's possible no deal will be completed, said the people, who declined be identified because the discussions are confidential.

A person close to JPMorgan said the bank may also be interested in buying Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds.

Dimon, whose New York-based firm has suffered fewer losses than rivals during the credit-market contraction, has said he's open to making an acquisition. The bank has "plenty of capital,'' he told the audience at a dinner hosted by the Economic Club of Washington on March 12, the day before his 52nd birthday.

'Devastating blow'
The Fed acted to prevent the failure of the second-biggest underwriter of US mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week.

"I don't think they can afford to let Bear go,'' said Charles Geisst, the author of "100 Years on Wall Street,'' referring to the New York Fed bailout. "At this particular moment in time, it would be a devastating blow to the markets.''

Bear Stearns, founded in 1923, acted in response to ``market rumors'' of a liquidity crisis, CEO Schwartz, 57, said in a separate statement. He said earlier this week that the company's ``liquidity cushion'' was sufficient to weather the credit-market contraction.

Bear Stearns's cash shortfall began March 11 after rumors spread that it lacked sufficient access to capital, and lenders and clients began withdrawing funds, the Washington-based U.S. Securities and Exchange Commission said in a statement released late yesterday.

Shares tumble
"We have tried to confront and dispel these rumors and parse fact from fiction,'' Schwartz, who was named CEO less than three months ago, said in the company's statement yesterday. "Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.''

The announcement caused financial shares to plunge, with Bear Stearns tumbling $27 to $30 in New York Stock Exchange composite trading. The stock has lost 66 percent of its value this year. The sinking share price has wiped out $10.5 billion of shareholder value in the last three months.

Lehman Brothers Holdings Inc., Citigroup Inc. and Bank of America Corp. also led declines as all 10 industry groups in the Standard & Poor's 500 Index fell yesterday. Lehman, the biggest underwriter of U.S. mortgage bonds, said it obtained a $2 billion, three-year credit line from 40 banks.

Bear Stearns's long-term counterparty credit rating was reduced three levels to BBB by Standard & Poor's. The rating may be cut further, New York-based S&P said. It lowered the short- term rating to A3 from A1. Moody's Investors Service also downgraded the company's long-term rating to BAAL from A2.

Cayne's pick
Bear Stearns, which survived the Great Depression and first sold shares to the public in 1985, helped trigger a crash in the market for home loans to borrowers with blemished credit histories after two of its hedge funds collapsed in July.

The failure of the two funds, which invested in securities linked to subprime mortgages, prompted a sell-off of the assets, which in turn led investors to shun other high-yield debt.

Schwartz, an executive with more than 30 years of experience at Bear Stearns, was the hand-picked choice of his predecessor, James ``Jimmy'' Cayne, 74, who remains non- executive chairman of the firm. Cayne stepped down after reporting an $854 million fourth-quarter loss, the first in the company's history.

On a conference call with analysts and investors after yesterday's announcement, Schwartz said that the company's book value was ``fundamentally'' unchanged. Clients continued to withdraw funds, he said.

For sale
The firm has retained investment bank Lazard Ltd. to seek ``strategic alternatives,'' Schwartz said. Bear Stearns said it's also in talks with JPMorgan about long-term funding.

Steven Black, JPMorgan's co-head of investment banking, said on Feb. 27 that the bank was considering acquiring a prime brokerage that was for sale then. He didn't name the seller. Bank of America, which agreed to buy mortgage lender Countrywide Financial Corp. for $4 billion on Jan. 11, said four days later that it planned to sell its prime brokerage.

``There happens to be one for sale and we are looking at it,'' Black said at a JPMorgan investor conference in New York.

Other potential Bear Stearns buyers include private equity firms such as J.C. Flowers & Co., the Wall Street Journal reported. HSBC Holdings Plc, Europe's largest bank by market value, also has the resources to make an acquisition.

`Good pockets'
The London-based lender may rise 30 percent in London trading this year, outperforming other U.K. banks because of its ``rich'' capital reserves, Keefe, Bruyette & Woods Ltd. analyst James Hutson wrote in a March 13 note to investors.

Bear Stearns led Wall Street shares lower this year as the world's largest lenders and securities firms wrote down assets linked to the subprime mortgage market. Analysts in the past month have lowered expectations for earnings in the first quarter. Bear Stearns said it will report results on March 17.

JPMorgan, the third-largest U.S. bank by assets, has posted $3.7 billion in writedowns, a fraction of the $22.4 billion reported by Citigroup, the biggest U.S. lender.

"JPMorgan is not loaded up with bad mortgage debt,'' said Vincent Farrell, principal at Scotsman Capital Management. ``Bear has a couple of very good pockets that any other firm would want to have if you can clear up the balance-sheet issue.''

Lewis's bet
About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July.

``The future for Bear will be found in a forced marriage,'' said Charles Peabody, an analyst at Portales Partners LLC in New York who rates the stock a ``sell.'' ``Their business model is broken. They don't have the ability to go it alone.''

Joseph Lewis, the second-largest shareholder in Bear Stearns Cos., wasn't planning to reduce his stake, a person close to him said March 11. Lewis, a 71-year-old billionaire, views his 9.4 percent investment as long-term, the person said.

The Fed is taking on the credit risk from collateral supplied by Bear Stearns, which approached the central bank for emergency funds, Fed staff officials said yesterday.

The Fed, under Chairman Ben S. Bernanke, voted unanimously to lend the funds through JPMorgan because it would be operationally simpler than a direct loan to Bear Stearns, the staff said on condition of anonymity. The regulator invoked a little-used law that allows it to make loans to corporations and private partnerships, which required a Board vote, according to the staffers.

Unanimous vote
The Fed said it was ``monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system.''

The senior staffers declined to describe how large the loan to Bear Stearns was, and declined to say whether a private- sector bailout was attempted before the Fed extended credit through JPMorgan.

``The issue now is whether Bear Stearns customers will stick around,'' said Bruce Foerster, president of South Beach Capital Markets and a former Wall Street executive. ``Some others have gotten through the same kind of troubles, some ended up being shut down or sold. I'm hoping Bear can get past it.''

JPMorgan's participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Geisst, the Wall Street historian.

The bank has also profited from others' crises. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.

JPMorgan's feather
``It may be a feather in JPMorgan's cap that they're considered able to do this,'' Geisst said. ``The Fed could have chosen any number of banks to do this, and they chose JPMorgan.''

President George W. Bush, seeking to calm investors yesterday, said policy makers will take ``appropriate steps'' to stabilize the financial system.

Bush spoke hours after Bear Stearns said it had received funding from the Fed and JPMorgan Chase. The central bank and the Treasury Department acted ``to mitigate disruptions to our financial markets,'' Bush said.

``Our economy obviously is going through a tough time,'' Bush told the Economic Club of New York. ``It's going through a tough time in the housing market and it's going through a tough time in the financial markets.''