KEY POINTS:
Some black humorist had stuck a two-dollar bill to the revolving doors at Bear Stearns' 43-storey headquarters on Manhattan's Madison Ave yesterday morning.
That is the knock-down price that JPMorgan's takeover puts on the company's shares, a dismal outcome for shareholders but, for the financial system, perhaps the only way to avert a full-blown banking crisis.
Those revolving doors had been spinning over the weekend faster than on a normal weekday. Inside, senior Bear employees, potential buyers from a slew of rivals, lawyers and regulators huddled in talks; on the phones, Ben Bernanke, chairman of the Federal Reserve, and Hank Paulson, President George Bush's Treasury Secretary.
Over 48 hours, with the opening of a new week of trading in Asia looming as their deadline, they planned the biggest banking bail-out in US history.
Even Jimmy Cayne was there. The septuagenarian chairman of Bear Stearns was on the golf course when underlings fought last summer to save two internal hedge funds, whose ultimate failure was the first outward sign of the severity of the credit crisis.
And last week, as Bear went into its final death spiral, Cayne was in Detroit, keeping his engagement at the North American Bridge Championship. Doomy Bear employees, searching for light relief on Friday, as their clients and trading partners deserted the firm, followed Cayne's bridge scores on the financial blogs and the tournament website. (He finished 26th after a strong start.)
The chairman's breathtaking ability to be somewhere else at crucial moments in Bear's downfall has become one of the grim jokes of the credit crisis, but there is no doubt that its collapse is a tragic moment for a man who has worked there for more than four decades.
The deal that was struck late on Sunday all but wipes out the fortune he had tied up in Bear Stearns stock. He owns 5 per cent of the company, worth a meagre US$11.7 million ($14.5 million) now, compared with close to US$1 billion before the credit bubble burst.
The collapse of his firm came swiftly last week, a gathering crisis of confidence that a dramatic intervention by the Federal Reserve and JPMorgan on Friday failed to arrest.
What at the start of the week had been rumours about Bear's cash reserves, by Wednesday had turned to reports of financial institutions refusing to do business with the company. That frightened others, and an exodus of clients and trading partners gathered steam on Thursday. The situation fed on itself with dizzying speed. An appearance on television by Alan Schwartz, chief executive, sought to reassure, but only drew more attention to the crisis.
By close of play last week, it was clear that few of Bear's traditional trading partners were going to do business with the firm, and it would be unable to meet its short-term trading obligations. In short, it was bust.
For Schwartz and his fellow directors, and for the Federal Reserve, the formal choice was between selling the business for pennies or filing for bankruptcy. In practice, the freeze on Bear's assets that a bankruptcy would have entailed would have caused a cascade of losses and chaos at the financial institutions that trade with it, and for the Fed officials working night and day at Bear since Thursday, that was unthinkable.
They began cajoling for a deal; Bear's bosses and advisers ordered food and settled in for a long weekend.
Through Saturday and Sunday, bosses called in Bear employees to prepare details of its trading positions for outside perusal. Meanwhile, they set up conference rooms for executives from rival firms and invited them to come to pore over the books.
Barclays and Royal Bank of Canada reportedly came in for a look, the private equity firms Kohlberg Kravis Roberts and JC Flowers, too, but none of these progressed far. In the end, JPMorgan Chase, which had been funnelling money between the Federal Reserve and Bear Stearns since Friday's stop-gap rescue, was the best placed to deal and had the big guns in place to make crucial decisions as the clock ticked.
Jamie Dimon, JPMorgan's chief executive, went without sleep to keep abreast of the deal, coming close to an agreement on Saturday, and finally signing a deal with just hours to spare before the start of Asian trading.
On Sunday night, Dimon began calling Bear's trading partners to assure them that JPMorgan would honour their trades.
President Bush heaped praise on Paulson yesterday, a nod to his interventions over the previous days. As a former head of Goldman Sachs, Paulson knew the key players in the weekend drama well, and knew better than any the consequences of Bear's failure.
He had been on the 5am conference call on Friday with Bernanke and his vice-chairman, Donald Kohn, the New York Fed president, Timothy Geithner, and the Treasury Undersecretary, Robert Steel, which decided to try to avert panic by extending a loan to Bear via JPMorgan.
When it was clear that loan was not going to save Bear, on similar, hastily arranged conference calls, Paulson was instrumental, too, in deciding to in effect instruct the bank to find a buyer.
Regulators from the Securities and Exchange Commission fanned out across the other brokerages over the weekend to assess the adequacy of their cash reserves in case Bear did file for bankruptcy.
Meanwhile, the Federal Reserve was preparing an extraordinary change of policy of its own, calling together its five governors yesterday to approve a Depression-era provision that allows it to lend money and securities directly to investment banks and other securities houses. What Bear Stearns had not been allowed to do in the early days of the run on the bank there, its rivals will now be able to do, namely to offload their mortgage-backed securities to the Fed as collateral for more readily tradeable loans.
By doing that, the Fed's governors fervently hoped, the long and fretful hours they had just been through are not to be repeated.
BEAR FALLS
Last Monday (US time): Rumours begin to spread about the poor state of Bear Stearns' cash reserves.
Wednesday: Reports circulate of financial institutions refusing to do business with the bank. Bear Stearns chief executive Alan Schwartz appears on TV and says the company is stable.
Friday: Bear Stearns shares tumble as much as 50 per cent _ knocking more than US$3 billion off its market capitalisation by the end of the day. The Federal Reserve approves a rare arrangement to try to prop up Bear Stearns by extending credit to the bank through JPMorgan Chase, but fails to stop the slide.
Saturday: Bear Stearns offers its books to potential buyers.
Sunday: JPMorgan Chase agrees to buy Bear Stearns for US$2 a share, more than 90 per cent less than Friday's closing price of US$30.85. To facilitate the deal, the Fed commits to funding up to US$30 billion of Bear Stearns' assets.
- INDEPENDENT
