Bear on the cheap: JP Morgan rescues the market Update: Being "silly"?

One of the major Wall Street firms just sold itself for about 6% of its value as of Friday, and analysts somehow see this as a positive sign for the economy? Bear Stearns, which had a market capitalization of over $3.5 billion on Friday, will go for a mere $236 million today to JP Morgan, who can apparently absorb the crash of Bear Stearns’ credit business. The Fed and JP Morgan attempted a bailout last week, but it apparently wasn’t enough:

Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.

The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies’ boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday’s close, Bear Stearns’s stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.

Effective immediately, J.P. Morgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. The deal isn’t subject to any conditions, except shareholder approval. It is expected to close before the end of the second quarter.

Watch the open for today’s market to see whether investors believe this to be an improvement in the overall financial market or a signal that much more instability will follow. Bear Stearns sold for as much as $170 per share as late as January 2007. The rapid descent of one of Wall Street’s most prominent firms will likely give many investors the bends, and we can expect people to start rethinking their money placement even more than before.

Another question will be how much protection JP Morgan got from the liabilities Bear Stearns created for itself. The Fed and the Comptroller of the Currency apparently cheerleaded this bid, and perhaps they did a little more than cheerlead. JP Morgan played a major role in last week’s bailout and now winds up owning the whole company. Did Washington agree to share the exposure even further in order to save some confidence in the banking and credit markets? How much intervention will the Bush administration use?

One last interesting point in this article concerns the speculation that a foreign bank might buy Bear Stearns before this deal was announced. The Wall Street Journal reports that Bear Stearns employees had hoped for such a rescue as it would mean fewer lost jobs. With all of the concern over sovereign wealth funds, did the Fed arrange this specifically to keep an SWF from taking control over one of the major financial firms in the US?

Update: How badly were analysts caught on the collapse of Bear Stearns? Last Tuesday, Jim Cramer was scolding people for “being silly” by thinking about dumping their stock — at $65:

Cramer may want to look for a new line of work.