Bear Stearns was racing Sunday afternoon to sell
itself to JPMorgan Chase for more than $2 billion, according to
people involved in the talks. Meanwhile, Bear Stearns, whose solvency is in
question, was also making preparations to file for bankruptcy protection as a
backup plan should a deal not be reached, these people said.
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Mark Lennihan/Associated Press
The headquarters of Bear Stearns on Madison Avenue in
Manhattan.
A deal for Bear Stearns would end the independence of one of Wall
Street?s most storied firms and help halt a sweeping panic that set in at the
end of last week, causing Bear Stearns?s stock to swoon 47 percent on Friday.
If an agreement is not reached and Bear Stearns files for bankruptcy, it could
cause an even deeper global scare over the fate of the financial system.
The talks, which are being overseen by the Federal Reserve and the
Treasury Department because of their potential effect on financial markets,
are being rushed in the hopes of reaching a deal before stock markets open in
Asia at 8 p.m. Eastern time.
Bear Stearns?s chief executive, Alan D. Schwartz, and other top Bear
executives huddled in all-day meetings at the firm?s Madison Avenue
headquarters, trying desperately to persuade skeptical potential suitors that
the firm was worth buying for a price that would likely represent a steep
discount to its book value, considered the truest measure of the financial
health of a banking institution.
JPMorgan has been balking at the deal in the absence of guarantees from
the Federal Reserve that its liabilities would be limited, people involved in
the talks said. JPMorgan was working with the Federal Reserve on Sunday
afternoon to hash out exactly what liabilities would be guaranteed, said these
people, who insisted on anonymity because they were not authorized to speak
publicly about the talks.
On Friday, JPMorgan, with the backing of the Federal Reserve Bank of New York, said it would
provide financing in order to keep Bear Stearns solvent as lenders and clients
rushed to pull their money out.
At Friday?s closing price of $30 a share, Bear Stearns is valued at a
yawning 62 percent discount to the $80 book value that the firm has reported,
reflecting the broad view among investors that the fallout from the credit
crunch has permanently devastated Bear?s core mortgage operations.
At a market capitalization of $3.5 billion, investors are concluding, for
now, that the business of one of Wall Street?s oldest investment banks is
perhaps worth no more than $2 billion, accounting for the firm?s midtown
skyscraper, which is probably worth at least $1 billion.
Wall Street analysts say that the sudden collapse of Bear Stearns is not
likely to set off a wave of consolidation in the beleaguered financial
services industry. That is because the same fear that has paralyzed the
markets has paralyzed buyers.
There is little faith in the assigned or ?marked? value of so many
assets, including but not limited to mortgage-related securities. In fact, the
experience of Bear Stearns proves that it is confidence, not capital, that
topples even the savviest financial institutions.
?Once you have a run on the bank you are in a death spiral and your
assets become worthless,? said David Trone, a brokerage analyst at Fox Pitt
Kelton. ?If JPMorgan can pull off a rescue, the assets can be saved,? he
argued. But if not, the assets may lose their value.
According to Mr. Trone?s analysis, Bear Stearns?s best-case scenario
would be to sell for $60 a share, a value based on a few key assumptions:
clients stop pulling their business from Bear, the units produce half their
normal revenue, and the troubled securities are reduced in value by a
third.
But the market did not put much faith in the Fed?s bailout of the firm,
announced on Friday, suggesting to Mr. Trone that it may have to sell for $30
or less. Bear Stearns?s hedge fund servicing business and its clearing
operations have traditionally been profitable operations, though they have
suffered in recent months as investors and lenders have lost confidence in
Bear.
JPMorgan, the private equity investor J.C. Flowers and others have been
poring through Bear Stearns?s books since Friday, with the assistance of
Samuel Molinaro, Bear?s chief financial officer, and senior members from the
firm?s bond and mortgage operations.
Throughout much of its history, Bear Stearns has masterfully persuaded
the market that its business ? narrowly focused on mortgage finance ? was
worth more than it actually was. To some degree this trick has been a
testament to the coy gamesmanship of two of its past leaders, Alan ?Ace?
Greenberg and James E. Cayne.
Both men are devout bridge players, and Mr. Greenberg is an amateur
magician to boot, so they are well schooled in the art of not showing their
hand. Mr. Cayne?s hint eight years back ? that he would sell the firm only for
four times its book value ? was even then a flight of financial fancy.
Wall Street investment banks rarely command such a premium to their book
value, given the inherent and unpredictable risks of their business.
Nevertheless, Mr. Cayne and Mr. Greenberg were adept at spreading the view
that Bear Stearns was constantly being pursued by buyers as varied as European
commercial banks and even banks like JPMorgan, though it was never clear that
any of these talks reached a serious level.
But Bear Stearns?s quirky culture and the high pay it awarded its senior
executives made it a difficult fit for larger, more staid institutions, and it
always seemed that Mr. Greenberg and Mr. Cayne were having too much fun
running their business to sell it to an outsider.
Now Mr. Schwartz, a longtime investment banker whose approach to
deal-making is more pragmatic and results-oriented than his predecessor, is
racing against the clock to seal a deal that salvages some measure of value
for shellshocked Bear Stearns employees, who own more than 30 percent of the
firm, and its investors.
?Banks and brokerages are a house of cards built on the confidence of
clients, creditors and counterparties,? Mr. Trone said. ?If you take chunks
out of that confidence, things can go awry pretty quickly. It could happen to
any one of the brokers.?