Sold!

Bear Stearns closed at $30 per share on Friday afternoon. It sold for $2 per share Sunday night.

Fingers Crossed.

From the Wall Street Journal's website:

Bear Stearns Cos. was closing in on a deal Sunday afternoon to sell itself to J.P. Morgan Chase & Co., as worries deepened that the financial crisis of confidence could spread if Bear failed to find a buyer by Monday morning.

People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading. "None of these things is done until they're done," Treasury Department spokeswoman Michele Davis said Sunday afternoon. "But I think everyone's expectation is sometime in the early evening hopefully" the deal will be done.

Terms of the deal were still being hammered out Sunday afternoon. Reflecting the dire situation at Bear, the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m. Last year, the shares hit $170.

One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets -- such as its prime brokerage business that caters to hedge funds -- Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm's exposure, said people familiar with the matter.

Despite the emergency funding from J.P. Morgan and the Federal Reserve that was announced Friday and gives Bear access to cash for an initial period of 28 days, the clock is ticking against the 85-year-old company. Regulators, bankers and investors are concerned that the firm could plummet even further when markets open Monday. A continued exodus by parties that Bear trades with could even cause the investment bank to collapse.

Bailout Nation.

Gretchen Morgenson's column today is worth quoting at some length:

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.

Krugman on Politics

The last paragraph of this column seems inarguably true. Wall Street has long believed, not without reason, that it was immune from politics because of its perfectly hedged campaign contributions to the two major US political parties. But a financial melt-down of this magnitude generates its own politics and if, as now seems likely, American taxpayers end up paying hundreds of billions of dollars to bail out Wall Street, there will be a backlash against "malefactors of great wealth" like we have not seen in over half a century.

Breaking Views.

This short piece from Edward Hadas about the implications of the Bear Stearns collapse is worth re-printing in full:

Bear Stearns may be the big name in financial distress right now, but it could soon have company – thanks in part to the after-shocks of its own problems.

To start with, Bear or any new owner will be under pressure to shrink its $395bn balance sheet. That would mean pretty immediate trouble for some of the hedge funds that use Bear’s prime broking services. What’s more, with liquidity tight all around, a hasty selling programme at Bear could hit prices in many asset markets, perhaps leading to more painful margin calls. There could also be further knock-on effects in the already strained $45 trillion credit default swap market where Bear is a player. It could be hard for firms that have effectively engaged in bets with Bear to unwind them.

Then there are the more indirect effects. Like the prospect of a hanging, the near-failure of a competitor concentrates the mind. Brokers and banks will be more intent on deleveraging, even at the expense of accepting some losses. Cash raised on unattractive terms is better than a Bear-style liquidity crunch.

The sudden collapse of Bear will also add to the already great reluctance to lend to financial institutions. The credit default swaps at some other brokers widened sharply on Friday and the share prices of some banks took a hammering.

Scarce and expensive credit will amplify the general financial miasma. US banks will take another $50bn or so of write-downs in the first quarter, according to Bears’ own analyst. The reporting season resumes in earnest in the coming week. There could be more bad quarters to come, with US house prices still falling and defaults on other types of consumer debt starting to rise.

The authorities will clearly do what they can to prevent a vicious cycle of debt deflation. On top of their increasingly desperate measures to pump liquidity into the system, the market is already expecting a 100 basis points cut in the US overnight rate next week. But in a liquidity crisis, rates are almost irrelevant. The Federal Reserve’s ready rescue of Bear increases the odds of a generalised, taxpayer-funded financial bail-out.

The combination of super-low rates and a possible nationalisation of loan losses will add to the pressure on the already beleaguered dollar. Indeed, while Bear is biggest firm to hit the wall so far in this credit crunch, the biggest name in financial distress could eventually be the United States.

Old Media.

Picked up a copy of Time magazine lately? Did it seem a little thin to you? Wonder where all those ads that used to bulk up Time magazine have gone? If you guessed Google, you guessed right.

The End of Bear Stearns.

It survived two World Wars and the Great Depression. It hangs by a thread in the credit crunch of 2007-08. From today's Wall Street Journal:

On Monday, Bear issued a statement in which (Bear Stearns CEO Alan) Schwartz wrote that the firm's "balance sheet, liquidity and capital remain strong." On Wednesday, he ducked out of a Bear media conference in Palm Beach, Fla., for a CNBC interview in another effort to deflect speculation about Bear's situation.

But by Thursday afternoon, it was becoming clear within Bear that the firm couldn't withstand an accelerating retreat by worried customers -- in effect, a run on the bank. Securities firms that had been willing to accept collateral from Bear Stearns were insisting on cash instead. And the hedge funds that use Bear to borrow money and clear trades were withdrawing cash from their accounts. Around 4:30 p.m., Mr. Schwartz was convinced that Bear was facing a desperate situation.

You can read the rest here.

The Surge

Lt. General Odierno's review of the first year of the surge is well worth reading. You can do so by clicking here.

You Really Can't Make This Stuff Up.

What was the Chairman of Bear Stearns doing today while his firm teetered on the edge of catastrophy? Playing bridge!

The Panic Button.

How bad is it on Wall Street? Read on.