JPMorgan is acquiring Bear Stearns at a huge discount of $2 per share. On Friday the stock closed at $30 per share.
The Fed's fingerprints were unapologetically all over the transaction; it is rare for the monetary authority to step into a private market transaction. However, given Bear Stearns' reach into the capital markets and its size--one of the largest brokers and underwriters in the financial markets--government involvement was all but expected.
As part of the deal, the Fed has promised to provide $30 billion to JPMorgan to finance the illiquid assets held by Bear Stearns. The Fed also took two other key steps on Sunday to stabilize markets in what was the first weekend emergency action in more than 30 years.
First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets, the Bank reported on its website on Sunday. This facility is available for business today and will be in place for at least six months. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities and the interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.
Second, it decreased the primary credit rate from 3.5% to 3.25%, thus lowering the spread of the primary credit rate over the Federal Open Market Committee's target federal funds rate to one-quarter percentage point. The Fed also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days. Although unorthodox for the monetary authority, these steps were taken with a fundamental goal in mind, the Fed says in a prepared statement. They are "designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth," it notes.
Bear Stearns' troubles metastized on Friday when it became clear that counterparties and clients had lost confidence in the firm and stopped trading with it. Hoping to stem this flight of investor confidence, JP Morgan executives told listeners during a conference call on Sunday that it would guarantee Bear Stearns' trading obligations. The acquisition is expected to be complete in 90 days.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
