The headquarters of Bear Stearns, left, and JP Morgan Chase, right, overlook midtown Manhattan in this March 14 AP file photo in New York. - File
One of the biggest corporate casualties of the global credit crisis, Bear Stearns Cos, is about to vanish into history.
The company brought to the verge of bankruptcy amid heavy mortgage-related losses is expected to become part of JPMorgan Chase & Co after a vote today by Bear Stearns shareholders.
But while the vote will seal the buyout deal brokered by the Federal Reserve, the debate about the 85-year-old company's demise will continue as analysts, academics and politicians try to decide exactly what went wrong.
"The second-guessing will be enormous," said Richard X. Bove, a financial strategist with Ladenburg Thalmann.
Shareholders are being asked to approve a deal to buy Bear Stearns at $10 a share — a paltry amount considering that the stock was worth almost US$154 one year ago. With JPMorgan already controlling a 49.5 per cent stake in Bear Stearns, the buyout is all but guaranteed; the acquisition is expected to close over the weekend.
Bear Stearns began to unravel last year when two hedge funds it managed imploded because of heavy bets on subprime mortgage securities.
Rumours triggered run
Along with other big investment banks, it was forced to take US$2.75 billion in write-downs for soured investments on subprime mortgage-backed securities. Then rumours in mid-March about the company's cash position triggered a run on the investment bank that left it close to bankruptcy.
Bove and other analysts believe the Fed's direct intervention, persuading JPMorgan to buy Bear Stearns, will be the most-discussed issue going forward.
"This will all be hindsight in five years when academics decide if the market could have absorbed a bankruptcy, or if the government was right to get involved," Bove said.
The government reasoned that it orchestrated the sale of Bear Stearns and its $400 billion balance sheet to prevent fallout from its failure from hurting the rest of the global financial system; investment banks around the world have been forced to write down almost $250 billion from risky debt since last year. But critics believe the Fed's action sets a dangerous precedent, and could raise the expectation that the government will bail out investment banks that take too much risk.
Further, the quick sale of Bear Stearns also limited the chances for any competitive buyout offers.
There have been media reports that other companies entertained bids for Bear Stearns, including private-equity firm JC Flowers and Germany's Deutsche Bank.
"Did the Fed jump too quickly? We won't really know," said David Kotok, chairman and chief investment officer of New Jersey-based Cumberland Advisors.
"It would seem to me that if there was some intervening bid, we can argue that the decision may have been made precipitously."
Burned through cash reserves
The coming months might also reveal exactly what caused Bear Stearns to buckle, especially as JPMorgan begins to absorb and integrate some of the company's troubled business divisions.
Bear Stearns was said to have burned through US$15 billion in cash reserves in the days leading up to its sale, as rumours prompted major customers to take their business elsewhere.
There have been a number of reports that Bear Stearns' plans to turn over documents to the Securities and Exchange Commission that could show that rivals like Goldman Sachs Group Inc, Citadel Investment Group, and Paulson & Co slashed their exposure to the securities firm just before its collapse.
The SEC is expected to use the data to decide if any trading activity was improperly coordinated to manipulate or contribute to Bear Stearns' collapse.
John Nester, a spokesman for the SEC, would not confirm or deny the reports. Spokesmen for the three firms had no comment.
