COMMENTS: House of Morgan Buys at Fire Sale

Last week ended with Bear Stearns, the Wall Street brokerage house, on the brink of bankruptcy. This week started with the denouement. Over the weekend the Federal Reserve Board organized its takeover by rival JP Morgan. Morgan's buyout was not only at the bargain price of $236m, it also included a sweetener from the Fed of $30bn in guarantees against the riskiest parts of Bear Stearns' portfolio of debt. The end of Bear Stearns was the unanimous choice for Story of the Day, leading all three newscasts, including CBS, which had Russ Mitchell as substitute anchor for Katie Couric.

The historic nature of the federal intervention in the capital markets was driven home by NBC. Anchor Brian Williams called it the first of its kind since the Great Depression. Carl Quintanilla from CNBC, NBC's sibling financial news cable channel, quoted former central banker Alan Greenspan characterize the underlying crisis in the housing market to be "the most wrenching since the end of World War II." On NBC's In Depth, Mike Taibbi profiled billionaire real estate developer Mort Zuckerman as seeing "the worst economic downturn in his lifetime."

ABC's Dan Harris (embargoed link) reported that the motive behind the Fed's intervention was to stave off a "fullscale meltdown" on Wall Street that an outright collapse at Bear Stearns could have triggered. CNBC correspondent David Faber judged that the Federal Reserve Board's decision to extend the loans it usually offers only to commercial banks to investment banks too, like Bear Stearns, was "perhaps more important" than the Morgan deal itself.

President George Bush congratulated the Fed for its swift action "to bring order to the financial markets," ABC's Harris told us. This prompted A Closer Look from Harris' colleague Terry Moran. Moran sarcastically quoted the President's own words back to him--"It is not the government's job to bail out speculators"--noting that there had been no such federal intervention on behalf of laid-off Ohio factoryworkers or foreclosed and evicted homeowners. "Those rules did not seem to apply to Bear Stearns" a firm Moran called "an aggressive Wall Street buccaneer that took big risks for big profits." In the end "the free market did not work here; the government did."

Yet if there was a bailout, Bear Stearns was hardly its beneficiary, being forced into a distressed sale at rock bottom prices. CNBC's Quintanilla told us that a single investor lost $1bn in the deal as the firm lost "90% of its value in one weekend." Bear Stearns management will face a class action suit from its shareholders, CBS' Anthony Mason pointed out, as the firm's share price fell from $170 to $2 in little more than a year: "Nearly a third of Bear Stearns is owned by its employees. Not only have their savings been wiped out but more than half of those 14,000 workers reportedly could be fired."

If any institution was the beneficiary of federal largesse it was JP Morgan. "The Fed essentially eliminated the risk for JP Morgan," ABC's Harris observed, by its $30bn indemnity on any bad debt. Furthermore, for its $236m purchase price it picked up Bear Stearns' headquarters building on Manhattan's Madison Avenue. CNBC's Quintanilla showed us the frontage, "worth more than $1bn by itself."


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