Fed Cuts Discount Rate & $2 Bear Stearns Fire Sale

Overnight: Nikkei -4%; Hang Seng -5%; European borses indicating a -2% drop to open; SP500 futures -27.

The dollar fell the most in eight years against the yen, falling to 95.76 yen, the weakest since Aug. 15, 1995. The dollar is at its weakest since 1971.

The Fed made its first weekend change in borrowing costs since 1979. The Fed cut its discount interest rate at an emergency meeting by 25 bps to 3.25%.

The Fed also will lend to the 20 dealers that buy Treasury securities directly from it. This opens up lending to firms other than commercial banks for the first time.

Clients, alarmed by rumors of a cash shortage, withdrew $17 billion in two days from Bear Stearns.

Faced with the prospect of bankruptcy, the 5th largest securities firm, was acquired for less than 10% of its March 14 value.

Last year, Bear shares peaked at $170, which gave it a market valuation of $20.4 Billion.

Today, JPMorgan Chase, #3 US bank by assets, bought Bear Stearns for about $240 million or $2 a share.

Bear Stearns CEO Alan Schwartz was forced to accept the deal as part of an effort by the central bank to stave off a broader market panic.

The Fed will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns's less-liquid assets.

The Nattering One muses... witness the Bear shareholders getting completely wiped out in this bailout.

Makes one seriously think twice about current stock market, real estate and asset valuations.

According to the Daily Telegraph, Goldman Sachs will reveal $3 billion in writedowns when it releases quarterly earnings tomorrow.

When asked why JPMorgan was paying about $2 a share for a company with a book value of $84 a share,

JPMorgan CFO Mike Cavanagh responded: "the price reflected the risk the firm was taking.

It gives us the flexibility and margin of error that's appropriate given the speed at which the transaction came together
."

Do you feel lucky? Do you feel safe? Are you confident in your asset valuations? Bear Stearns's profit exceeded $2 billion in 2006.

Folks, this whole meltdown is about to get VERY UGLY. Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed:

regarding the Fed's $30 Billion aid and recent actions...

"It is a serious extension of putting the Federal Reserve's balance sheet in harm's way.

We learned that Bear Stearns's balance sheet on close examination was worth a 10th of its market value.

That's got to tell you the economy is in a pretty precarious state
." Hattip to Bloomberg.

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