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.
Sign Up and Save
Get six months of free digital access to The Charlotte Observer
“The second-guessing will be enormous,” said Richard 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 the stock was worth almost $154 a year ago. With JPMorgan already controlling a 49.5 percent 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. Along with other big investment banks, it was forced to take $2.75 billion in write-downs for soured investments on subprime mortgage-backed securities. Then rumors 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.
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 $15 billion in cash reserves in the days leading up to its sale, as rumors prompted major customers to take their business elsewhere.
For the 14,000 Bear Stearns employees that began the year with jobs, the next few weeks will be difficult. JPMorgan chief executive Jamie Dimon plans to keep a little more than half of them; the rest will be added to the nearly 65,000 people who have lost jobs at banks, brokerages and mortgage companies in the past 10 months.