How the Bear Stearns deal got done

Without the Fed's $30 billion, JPMorgan Chase couldn't have bought Bear Stearns without writing down its own mortgage holdings.
By Roddy Boyd, writer


NEW YORK (Fortune) -- The Fed's agreement to buy up to $30 billion in troubled Bear Stearns mortgage bonds may have saved JPMorgan Chase from a big writedown, according to senior executives involved in the transaction.

JPMorgan (JPM, Fortune 500) executives initially decided to pass on a purchase of Bear Stearns this past weekend, Bear execs said, largely because of the risks tied to Bear's mortgage portfolios. They changed their minds after the Fed agreed to pony up $30 billion in so-called nonrecourse loans - agreements that transfer the risk of Bear's bad mortgage bets to U.S. taxpayers. The Fed's decision paved the way for the Sunday evening deal that put Bear in JPMorgan's hands for $2 a share, a 93% discount to Friday's closing price.

But the value of Bear's balance sheet wasn't the only worry at JPMorgan. Bear execs say JPMorgan was also worried that without help from the Fed, buying mortgages from Bear (BSC, Fortune 500) could force JPMorgan to write down the value of its own mortgage holdings.

That fear stemmed in part from the sharp decline in the value of mortgage debt this year, along with the different calendars the firms report on. At the end of February, Bear had $16 billion in commercial mortgage-backed securities, $15 billion in prime and Alt-A mortgage bonds and $2 billion in various subprime bonds, JPMorgan said. The value of those securities has been in sharp decline, along with U.S. house prices. Indeed, values in the mortgage securities market have plunged just over the past month, as investors in lenders such as Thornburg Mortgage (TMA) - which is dealing with unmet margin calls triggered by plunging prices - will surely tell you.