Bear Stearns collapse

10 biggest Losers
JPMorgan Surges After Capturing Bear Stearns for $240 Million

March 17 , 2008(Bloomberg) -- JPMorgan Chase & Co. surged in New York trading after striking a deal backed by the Federal Reserve to buy Bear Stearns Cos. for $2 a share, 90 percent less than the 85-year old firm's market value last week.

Citic Scraps Deal

Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under terms of the JPMorgan takeover, his holdings are now worth about $12 million.

Joseph Lewis, Bear Stearns's second-largest shareholder, has spent more than $1 billion on the firm's stock since September, paying as much as $150 a share. Lewis, a 71-year-old billionaire, wasn't planning to reduce his stake, a person close to him said March 11. He's now entitled to $22 million of JPMorgan shares.

Beijing-based Citic Securities Co. canceled a proposed $1 billion investment in Bear Stearns, said Kong Dan, chairman of Citic Group, the company's parent, in an interview today. Citic had agreed in October to buy a stake in Bear Stearns when the company's stock was trading at more than $117.

45-Story Building

``To see a situation involving a bailout lead to shareholders getting pretty much wiped out is a pretty significant event for the market,'' said Ben Wallace, who helps manage $800 million, including stock in JPMorgan, for Grimes & Co. in Westborough, Massachusetts. ``It's going to raise concerns'' about the value of financial stocks, he said.

The Fed's attempt to rescue Bear Stearns last week with a cash infusion failed to avert a crisis of confidence among the company's customers and shareholders, who drove the stock down a record 47 percent on March 14, when the emergency funding was announced.

Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per- square-foot that comparable office space in the city is currently fetching.

Counterparty Risk

JPMorgan Chief Financial Officer Mike Cavanagh said on a conference call after the sale was announced that the bank was comfortable with the values Bear Stearns had assigned to the mortgage-related assets on its books. Asked to explain why JPMorgan was paying about $2 a share for a company with a book value -- assets minus liabilities -- of $84 a share, Cavanagh said 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,'' he said. JPMorgan said it was confident Bear Stearns shareholders would approve the sale.

``If you're buying equity for free and the liabilities are pretty well capped, it sounds like it's good for JPMorgan shareholders,'' Wallace said. ``The thing that everybody's been worried about has been the counterparty risk, and if this gives people more confidence, that will be good for the markets.''

`A Lot of Value'

Minutes after the deal was announced, the Fed cut the so- called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it.

Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts said.

The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July during the biggest housing slump in a quarter century.

``As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,'' said William Fitzpatrick, who helps oversee $1.6 billion at Racine, Wisconsin-based Optique Capital Management, including JPMorgan shares. ``That's the crown jewel, and that would fit into JPMorgan's business extremely well.''