Bad News Bears

This story has been in all the TV news reports over the weekend – but the fact I wanted to draw attention to was that Bear Stearns was valued at $169 per share just about a year ago – and today’s price was $2. And this could easily have been regarded as a “safe haven” kind of investment. My forward-looking sunglasses are far from rose-tinted. The news breaks this morning that the bank has been bought by JP Morgan for a fraction of its original value. The cartoon is by Pat Bagley of the Salt Lake Tribune. This article was written by Tony Bonsignore in Citywire

Just when it seemed the news couldn’t get any worse, it duly did, and on a Sunday evening too. Last night’s shock announcement that troubled US investment bank Bear Stearns had been forced into an emergency sale sent shockwaves through Asian and European markets this morning, as panicked investors tried to figure out where the madness might end. Not anytime soon, was the general conclusion.

The scale of the collapse is terrifying. As America’s fifth largest investment bank Bear Stearns was at the forefront of the US housing-led economic boom of the past decade, and currently employs some 14,000 staff. At its peak in January 2006 – interestingly around the same time as the US housing market peaked – the company’s shares were valued at a mind-boggling $169.

Last night’s deal agreement with JP Morgan Chase valued the company at a measly $2 per share, an ignominious way to end 85 years of independence. But perhaps even more disturbing is the speed and nature of Bear Stearns’ fall from grace. That a deal happened at all was only thanks to the US Federal Reserve, which agreed to fund up to $30 billion of the deal. And all this barely a week after the Fed injected more than $400 billion into the financial markets in a desperate attempt to shore up liquidity – a move that some cynics said at the time was indicative of a looming solvency crisis at a major US bank. It is now clear that these worries were well founded, though investors will take no solace in being proved right.

Most commentators this morning agree that the credit crunch has entered a frightening new phase, and that worse may be yet to come. In the very short term investors will be nervously looking to this week’s results from Wall Street giants Goldman Sachs, Lehman Brothers and Morgan Stanley, looking to assess how far they have been hit (or escaped) the worst of the sub-prime fallout. Even then, however, suspicions are likely to remain that banks are yet to come clean about the real extent of their losses. Punch-drunk investors are understandably reticent to believe anything the banks tell them right now.

There are also growing fears that Bear Stearns is not the only major US bank facing solvency issues. If Bear Stearns does turn out to be an isolated incident then we may look back on this as the moment the crisis peaked. However, if another bank hits the skids it is difficult to see how the Fed can contain the damage in the same way; another JP Morgan-style deal will certainly be considerably more difficult to arrange. In that nightmare scenario the US may yet see a full-blown banking crisis on a scale not seen since the 30s, something almost too dreadful to contemplate. Unfortunately in these dark times investors and central bankers cannot help but do just that.

Closer to home, the long term impact of our own banking collapse may become a little clearer later today with news expected of a massive job cull at Northern Rock. The government-owned lender is set to shed at least 2,000 jobs and halve its loan book over the next few years, in a revised business strategy aimed at meeting European competition rules. Meanwhile the Centre for Economic Business Research suggests that some 10,000 City jobs are set to be lost over the next year as a result of the ongoing market turmoil – an increase of more than 50% on its previous estimate, made just three months ago.
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