JPMorgan Acts to Buy Ailing Bear Stearns at Huge Discount – New York Times
March 16, 2008
By ANDREW ROSS SORKIN and LANDON THOMAS Jr.

Bear Stearns, pushed to the brink of bankruptcy by what amounted to a run on the bank, agreed late Sunday to sell itself to JPMorgan Chase for a mere $2 a share, narrowly averting a collapse that threatened to cascade through the financial system.

The price represents a startling 93 percent discount to Bear Stearns’ closing stock price on Friday on the New York Stock Exchange.

Bankers and policy makers raced to complete the deal before financial markets in Asia opened on Monday, as fears grew that the financial panic could spread if Bear Stearns failed to find a buyer.

The deal, done at the behest of the Federal Reserve and the Treasury Department, punctuates the stunning downfall of one of Wall Street’s biggest and most storied firms. Bear Stearns weathered the vagaries of the markets for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now afflicting the American economy.

Reflecting Bear Stearns’s dire straits, JPMorgan agreed to pay just $236 million for the firm, a figure that includes the price of Bear’s soaring headquarters on Madison Avenue in Manhattan. At $2 a share, JPMorgan is buying Bear Stearns for a third of the price at which the troubled firm went public in 1985. Only a year ago, Bear’s shares fetched $170. The cut-rate price reflects deep misgivings about the firm’s prospects.

To me, there are two very scary things about this deals.

One of the scary things about this deal is that the the company is selling for WELL less than book value, so far less than book value that the price of the sale doesn’t even cover the entire value of Bear Stearn’s headquarters on Madison Avenue, which was built for $280-million, and currently is considered to be worth about $1-billion.

The other is, of course, the speed at which it went down. When Nick Leeson’s rogue trades bankrupted Barings Bank in 1995, it was only 8 days from when the damage was discovered (on 23 February 1995), until ING purchased the bank for a mere £1 on 3 March 1995. That this deal was cut even more quickly illustrates the extent of the damage to Bear Stearns, and makes me wonder even more about the health of other companies in my industry.

The company that really scares me is Goldman Sachs, which created and sold many of these self-same securities, and simultaneously sold them short (effectively selling them twice) in a declining market, cleaning up on trading revenues and “profits”.

It’s going to be an interesting week.