On Mar 16, 8:39 pm, Too_Many_Tools wrote:
One for the record books...

The US taxpayer is paying for this one.

How do you like being a part owner of a bankrupt bank?

There are likely more to come.

And the Iraq War is costing you $12 billion a month.

How deep are your pockets?

TMT

JPMorgan to buy Bear for $2 a share By JOE BEL BRUNO and MADLEN READ,
AP Business Writers

Just four days after Bear Stearns Chief Executive Alan Schwartz
assured Wall Street that his company was not in trouble, he was forced
on Sunday to sell the investment bank to competitor JPMorgan Chase for
a bargain-basement price of $2 a share, or $236.2 million.

The stunning last-minute buyout was aimed at averting a Bear Stearns
bankruptcy and a spreading crisis of confidence in the global
financial system sparked by the collapse in the subprime mortgage
market. Bear Stearns was the most exposed to risky bets on the loans;
it is now the first major bank to be undone by that market's collapse.

The Federal Reserve and the U.S. government swiftly approved the all-
stock buyout, showing the urgency of completing the deal before world
markets opened. The Fed also essentially made the takeover risk-free
by saying it would guarantee up to $30 billion of the troubled
mortgage and other assets that got the nation's fifth-largest
investment bank into trouble.

"This is going to go down in very historic terms," said Peter Dunay,
chief investment strategist for New York-based Meridian Equity
Partners. "This is about credit being overextended, and how bad it is
for major financial institutions and for individuals. This is why
we're probably heading into a recession."

JPMorgan Chase & Co. said it will guarantee all business -- such as
trading and investment banking -- until Bear Stearns' shareholders
approve the deal, which is expected to be completed during the second
quarter. The acquisition includes Bear Stearns' midtown Manhattan
headquarters.

JPMorgan Chief Financial Officer Michael Cavanaugh did not say what
would happen to Bear Stearns' 14,000 employees worldwide or whether
the 85-year-old Bear Stearns name would live on after surviving the
Great Depression, two World Wars and a slew of recessions. He told
analysts and investors on a conference call that JPMorgan was most
interested in buying Bear Stearns' prime brokerage business, which
completes trades for big investors such as hedge funds.

At almost the same time as the deal for control of Bear Stearns was
announced, the Federal Reserve said it approved a cut in its lending
rate to banks to 3.25 percent from 3.50 percent and created another
lending facility for big investment banks. The central bank's official
meeting is on Tuesday. Before the emergency move to lower the discount
rate, which is the rate at which banks lend each other money, the Fed
was widely expected to again cut its headline rate by as much as a
full point to 2 percent.

"Having taking Bear Stearns out of the problem category, and the
strong action by the Federal Reserve, we would anticipate the market
will behave quite differently on Monday than it was Thursday or
Friday," Cavanaugh said.

Some analysts expected it to be a brutal day for global stocks,
nevertheless. Shortly after the news broke, Japan's benchmark Nikkei
stock index plunged more than 3 percent in morning trading.

A bankruptcy protection filing of Bear Stearns could have heightened
anxiety in world financial markets amid a deepening credit crunch. So
far, global banks have written down some $200 billion worth of
securities slammed amid the credit crisis -- more write-downs could
come. Last week, a bond fund controlled by private equity firm Carlyle
Group faltered near collapse because of investments linked to mortgage-
backed securities.

JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of
what the investment bank was worth just 16 days ago. It marked a 93.3
percent discount to Bear Stearns' market capitalization as of Friday,
and roughly a 98.8 percent discount to its book value as of Feb. 29.

"The past week has been an incredibly difficult time for Bear
Stearns," Schwartz said in a statement. "This represents the best
outcome for all of our constituencies based upon the current
circumstances."

Wall Street analysts say the bid to rescue Bear Stearns was more than
just saving one of the world's largest investments banks -- it was a
prop for the U.S. economy and the global financial system. An outright
failure would cause huge losses for banks, hedge funds and other
investors to which Bear Stearns is connected.

After days of denials that it had liquidity problems, Bear was forced
into a JPMorgan-led, government-backed bailout on Friday. The
arrangement, the first of its kind since the 1930s, resulted in Bear
getting a 28-day loan from JPMorgan with the government's guarantee
that JPMorgan would not suffer any losses on the deal.

This is not the first time Bear Stearns has earned a place in Wall
Street history. A decade ago, Bear Stearns refused to help bail out a
hedge fund that was deemed "too big to fail." On Friday, the tables
had turned, with the now-struggling investment bank in need of the
same kind of aid.

Bear Stearns was founded in 1923 and in recent years was best known
for its aggressive investing in mortgage-backed securities -- and what
was once a cash cow turned into the investment bank's undoing.

In June, two Bear-managed hedge funds worth billions of dollars
collapsed. The funds were heavily invested in securities backed by
subprime mortgages. Until that point, subprime mortgage-backed
securities were immensely popular with investors because of their
profitability.

The funds' demise and subsequent problems in the credit markets called
into question Bear Stearns' ability to manage its own risk and the
leadership ability of then-Chief Executive James Cayne. Critics of the
company said Cayne spent too much time away from the office last year
playing golf and bridge as the problems unfolded.

Cayne is the same executive who refused to let Bear Stearns provide
support as part of a Federal Reserve-led plan to rescue Long-Term
Capital Management in 1998. His reticence was said to deeply anger
some of his fellow Wall Street CEOs, and the episode came up every
time Bear was reported to be in trouble in recent months.

Cayne took over from the legendary Alan "Ace" Greenberg in 1993.
Greenberg joined Bear Stearns as a clerk, working his way up through
the ranks to eventually take over as CEO in 1978. Greenberg was known
for his irreverent style, and his regular memos to employees were
turned into a book called "Memos from the Chairman."

Before Greenberg's ascendancy to CEO, Bear Stearns began to expand
from its New York roots throughout the 1950s and 1960s, opening
international offices and expanding its U.S. operations.

____

AP Business Writers Jeannine Aversa in Washington and Stephen Bernard
contributed to this story.

FYI...

March 16, 2008
Fair Game
Rescue Me: A Fed Bailout Crosses a Line
By GRETCHEN MORGENSON
WHAT are the consequences of a world in which regulators rescue even
the financial institutions whose recklessness and greed helped create
the titanic credit mess we are in? Will the consequences be an even
weaker currency, rampant inflation, a continuation of the slow bleed
that we have witnessed at banks and brokerage firms for the past
year?

Or all of the above?

Stick around, because we'll soon find out. And it's not going to be
pretty.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of
JPMorgan Chase, the Federal Reserve Bank of New York conceded last
Friday that no sizable firm with a book of mortgage securities or
loans out to mortgage issuers could be allowed to fail right now. It
was the most explicit sign yet of the Fed's "Rescues 'R' Us" doctrine
that already helped to force the marriage of Bank of America and
Countrywide.

But why save Bear Stearns? The beneficiary of this bailout, remember,
has often operated in the gray areas of Wall Street and with an
aggressive, brass-knuckles approach. Until regulators came along in
1996, Bear Stearns was happy to provide its balance sheet and
imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R.
Baron, clearing dubious stock trades.

And as one of the biggest players in the mortgage securities business
on Wall Street, Bear provided munificent lines of credit to public-
spirited subprime lenders like New Century (now bankrupt). It is also
the owner of EMC Mortgage Servicing, one of the most aggressive
subprime mortgage servicers out there.

Bear's default rates on so-called Alt-A mortgages that it underwrote
also indicates that its lending practices were especially lax during
the real estate boom. As of February, according to Bloomberg data, 15
percent of these loans in its underwritten securities were delinquent
by more than 60 days or in foreclosure. That compares with an industry
average of 8.4 percent.

Let's not forget that Bear Stearns lost billions for its clients last
summer, when two hedge funds investing heavily in mortgage securities
collapsed. And the firm tried to dump toxic mortgage securities it
held in its own vaults onto the public last summer in an initial
public offering of a financial company called Everquest Financial.
Thankfully, that deal never got done.

Recall, too, that back in 1998, when the Long Term Capital Management
hedge fund required a Fed-arranged bailout, Bear Stearns refused to
join the rescue effort. Jimmy Cayne, then chief executive at the firm,
told the Fed to take a hike.

And so, Bear Stearns, a firm that some say is this decade's version of
Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop
dominated by Michael Milken, is rescued. Almost two decades ago,
Drexel was left to die.

Bear Stearns and Drexel have a lot in common. And yet their differing
outcomes offer proof that we are in a very different and scarier place
than in the late 1980s.

"Why not set an example of Bear Stearns, the guys who have this record
of dog-eat-dog, we're brass knuckles, we're tough?" asked William A.
Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash.,
and co-author with Fred Sheehan of "Greenspan's Bubbles: The Age of
Ignorance at the Federal Reserve." "This is the perfect time to set an
example, but they are not interested in setting an example. We are
Bailout Nation."

And so we are. After years of never allowing any of our financial
institutions to fail, they have become so enormous that nobody will be
allowed to sink beneath the waves. Otherwise, a tsunami would swamp
the hedge funds, banks and other brokerage firms that remain afloat.

If Bear Stearns failed, for example, it would result in a wholesale
dumping of mortgage securities and other assets onto a market that is
frozen and where buyers are in hiding. This fire sale would force
surviving institutions carrying the same types of securities on their
books to mark down their positions, generating more margin calls and
creating more failures.

As of last Nov. 30, Bear Stearns had on its books approximately $46
billion of mortgages, mortgage-backed and asset-backed securities.
Jettisoning such a portfolio onto a mortgage market that is not
operative would, it is plain to see, be a disaster.

But, who knows what those mortgages are really worth? According to
Bear Stearns's annual report, $29 billion of them were valued using
computer models "derived from" or "supported by" some kind of
observable market data. The value of the remaining $17 billion is an
estimate based on "internally developed models or methodologies
utilizing significant inputs that are generally less readily
observable."

In other words, your guess is as good as mine.

To some degree, what happened at Bear, of course, was a classic run on
the bank -- the kind immortalized in Frank Capra's homage to financial
responsibility, "It's a Wonderful Life." As fears about Bear's
financial position heightened, its customers began demanding their
cash and big hedge funds that were using the firm as an administrative
back office or lender moved their accounts elsewhere.

In addition, institutions that had bought credit default swaps from
Bear Stearns, insurance policies that protect against corporate bond
defaults, were scrambling to undo those trades as the firm's ability
to pay the claims looked dicier.

"For the government to print money at the expense of taxpayers as
opposed to requiring or going about a receivership and wind-down of
any insolvent institutions should be troubling to taxpayers and
regulators alike," said Josh Rosner, an analyst at Graham Fisher &
Company and an expert on mortgage securities. "The Fed has now crossed
the line in a very clear way on 'moral hazard,' because they have
opened the door to the view that they are required to save almost any
institution through non-recourse loans -- except the government doesn't
have the money and it destroys the U.S.'s reputation as the broadest,
deepest, most transparent and properly regulated capital market in the
world."

And here is the unfortunate refrain. Investors, already mistrusting
many corporate and government leaders, were once again assured that
nothing was wrong -- right up until the very end. So is it any wonder
investors react to every market rumor of an impending failure with the
certainty that it's true? In too many cases, the rumors turned out to
be true, notwithstanding the attempts at reassurance by executives and
policy makers.

Only last Monday, for example, Bear put out a press release saying,
"there is absolutely no truth to the rumors of liquidity problems that
circulated today in the market." The next day, Christopher Cox, the
chairman of the Securities and Exchange Commission, said he was
comfortable that the major Wall Street firms were resting on
satisfactory "capital cushions."

Three days later, it was bailout time for Bear.

HERE is the bind the Fed is in: Like the boy who puts his finger in
the dike to keep sea water from pouring in, the Fed finds that new
leaks keep emerging.

Regulators must do whatever they can to keep the markets open and
operating, and much of that relies upon the confidence of investors.
But by offering to backstop firms like Bear, who were the very
architects of their own -- and the market's -- current problems,
overseers like the Fed undermine a little bit more of that confidence.

Another worry? How many well-capitalized institutions remain at the
ready to take over those firms that may encounter turbulence in the
future? Banks just do not have the capital that is needed to rescue
troubled firms.

That will leave the taxpayer, alas. As usual.