If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
When Citigroup and Merrill Lynch each fessed up to nearly $10 billion in losses last quarter, investors believed the companies had finally scrubbed their books clean. Those hopes were a bit premature.
“The fourth quarter felt like the kitchen sink [quarter],” said Jaime Peters, a bank stock analyst at Morningstar. “We are going to find out it necessarily wasn’t.”
Citi and Merrill are among a group of major financial firms due to deliver ugly results for the first quarter in the coming week. The first quarter was marked by the near collapse of Bear Stearns, continued credit market woes and increased signs that the U.S. economy is indeed in a recession.
Overall, analysts anticipate that the banks’ results won’t be quite as bad as they were when they announced grim fourth-quarter results three months ago. But banks still find themselves squeezed by many of the same problems that plagued them at the end of 2007.
Bear Stearns was considering potential bankruptcy and liquidation options, and the private equity firm was trying to put together details to make its proposal viable.
The management did not believe it could open for business on Monday without a transaction that restored market confidence in the firm. Adding pressure to the situation, the firm was advised that it would not be able to start trading in Asia the next morning.
Meanwhile, the private equity buyer was unable to secure funding for the credit facility portion of its proposal in time and was not able to get support from the New York Fed, leaving JPMorgan as the only bidder.
JP Morgan said, based on the New York Fed’s willingness to provide $30 billion in special funding, it thought it could work toward a deal that valued Bear Stearns at $4 per share, but eventually decided that it could not offer more than $2, which was subsequently accepted.
How did the $2 offer from JP Morgan came about?
It seems that days before, Bear Stearns announced the company’s finances were sound. Still, nervous investors sold their shares sending the stock down more than 60% . The shares traded as high as $159.36 apiece in the last 12 months.
JPMorgan claimed that a private equity firm expressed interest in a transaction with Bear Stearns and proposed a deal that included a $3 billion cash infusion in return for 90% equity interest in the firm. The proposal required a $20 billion credit facility from a consortium of banks. Assurance that the New York Fed would make loans to Bear Stearns through its discount window for one year was also needed.
JP Morgan then met with representatives from Bear Stearns and its investment bankers to discuss a deal that would value Bear Stearns at $8 to $12 per share. It also considered buying 19.9% of the then outstanding shares, options to purchase its prime brokerage business and Bear Stearns’ headquarters building.
But by Sunday, JPMorgan expressed doubt that it would do the transaction because of the risk involved and informed Bear Stearns, the U.S. Treasury and the New York Fed, that to proceed, it would need some level of financial support from the New York Fed.
