BEAR STEARNS, the stricken US investment bank, was yesterday fighting against the clock on a deal to sell itself to JPMorgan Chase, amid growing concerns that failure to clinch an agreement by this morning could put other banks under severe strain.
The US Federal Reserve, which on Friday provided emergency funds to Bear, and the treasury are watching the situation closely. The authorities fear that, unless the crisis is resolved promptly, traders may turn their sights on other US and European banks.
"The Fed is most nervous about the systemic risk," said one senior executive at Bear, the fifth-largest investment bank in the US. "The government needs to stabilise the financial system."
Hank Paulson, treasury secretary, yesterday sought to allay fears that the crisis of confidence that hit Bear (undone by clients' rush to withdraw funds amid rumours over its financial health) would spread to the rest of the financial sector. "The government is prepared to do what it takes to maintain the stability of our financial system," he said.
People close to the situation said senior executives at Bear and JPMorgan, which is acting as a go-between for the Fed funds, had been locked in talks over a deal since Friday. "We're definitely in the mix," a senior person at JPMorgan said. With Bear's shares sharply lower and its liabilities unknown, JPMorgan could end up paying very little.
Bear's market value has plunged to just $3.5 billion (€2.25 billion) from a peak close to $20 billion in January last year, largely because of frenzied selling of its shares in the past week.
The value of Bear's head office in a prime location on New York's Madison Avenue, near JPMorgan's offices, may account for a big portion of the eventual sale price.
JPMorgan has been contacting clients to inform them of the coming consolidation. An executive in its private banking side told one client that the private bank had taken control of $150 million in assets of Bear's clients.
A deal is complicated by the fact JPMorgan is believed to be interested in only some of Bear's arms, such as the mortgage business and the prime brokerage unit.
Other groups, including JC Flowers, the private equity firm that worked with JPMorgan on an abortive bid for student loan group Sallie Mae, are believed to be considering some of Bear's businesses. But people close to the situation said the need to agree a speedy deal made an orderly break-up of Bear difficult, and it was more likely the firm would be acquired as a whole and split later.
Other bidders rumoured to have been interested in Bear, such as Royal Bank of Scotland and Barclays Capital in the UK, and Citadel, the US hedge fund, are not believed to be talking to the firm.
Bear, JPMorgan, JC Flowers, Citadel, RBS and Barclays Capital all declined to comment.
Deutsche Bank analysts expect US investment firms and commercial banks to report more than $9 billion in additional losses on leveraged loans in the first half of 2008.
- (Financial Times service)
