NEW YORK — With a deal in place to save Bear Stearns from bankruptcy, the company's shares traded above the offer price Monday even as investors began turning a critical eye to other investment banks amid worries about how far the credit contagion could spread.
Despite the weekend agreement for JPMorgan Chase & Co. to buy Bear Stearns for a fraction of its value last week, worries that other banks had sizable exposure to troubled credit markets sent global markets tumbling. The uncertainty was evident on Wall Street, where the Dow Jones industrials sank by more than 100 points.
At Bear Stearns' 47-story headquarters in midtown Manhattan, many employees said they still couldn't believe that the nation's fifth-largest investment bank is — essentially — out of business. Employees said there was no meeting to inform employees about what was happening.
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"It's my first job out of school. I thought it was a big company — it would be good experience," said Ki Byung, who works for a division of Bear Stearns. "Now after a couple of months something like this happens."
Instead of making money, Bear Stearns employees trudged boxes of their personal belongings out of the investment bank while JPMorgan managers filed into it for the first time from that bank's headquarters directly across the street. While no layoffs have been announced, analysts expect that they could be significant.
A complete collapse of Bear Stearns might have crushed the already-dwindling confidence in the global financial system, which has frozen up after last year's troubles in the subprime mortgage market.
Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse. But the fact that a major investment bank could reach the verge of buckling — and be sold at such a discount — sent dismay through Wall Street and beyond.
"One reaction is shock that a company that reaffirmed its book value at around $84 on Wednesday can be worth $2 per share four days later on Sunday," said Deutsche Bank analyst Mike Mayo.
While employees struggle to find any information they can, the financial industry wants to know exactly how badly Bear Stearns bet on mortgage-backed investments. Unwinding the nation's fifth-biggest investment houses should provide some insight into what other financial institutions might have on their books.
With Bear Stearns seemingly gone, investors pondered who might be next. Lehman Brothers Holding Inc. stock fell more than 34 percent Monday, following a 15 percent drop on Friday amid concerns it might be facing similar liquidity issues. Lehman Chief Executive Richard Fuld denied Monday that the firm was having such problems.
Bear Stearns shares fell $26.32, or 87.7 percent, to $3.68 — above the shockingly low price of $2 per share that JPMorgan Chase is paying — while JPMorgan rose $3.03, or 8.3 percent, to $39.57. UBS AG, hit hard by the same type of write-downs for mortgages that felled Bear Stearns, dropped nearly 12 percent in Zurich.
JPMorgan announced Sunday night that it would acquire Bear Stearns for $236.2 million in a deal that was fast-tracked by the federal government to avoid a bankruptcy. The price represents roughly 1 percent of what the investment bank was worth just 16 days ago.
The Federal Reserve and the U.S. government swiftly approved the all-stock buyout to complete the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.
"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we're probably heading into a recession."
JPMorgan said it will guarantee all business — such as trading and investment banking — until Bear Stearns' shareholders approve the deal, expected to be completed during the second quarter. The acquisition includes Bear Stearns' headquarters, which as one of the world's tallest buildings could fetch more than $1 billion in a sale.
Timeline of Bear Stearns' near collapse
NEW YORK — Investment bank Bear Stearns Cos. completed an emergency deal Sunday to be bought by JPMorgan Chase & Co. Bear Stearns was forced into a government-led bailout on Friday after finding itself unable to meet the demands of lenders and customers trying to pull their cash out.
The following is a timeline of recent events at the 85-year-old firm:
2007
•June 14: Bear reports a 10 percent decline in quarterly earnings as the mortgage market shows signs of cracking. Chief Financial Officer Sam Molinaro says, "We are impacted in a weaker mortgage market until that industry turns around."
• June 18: Reports say Merrill Lynch seized collateral from a Bear Stearns hedge fund invested heavily in subprime loans — those made to people with poor credit.
• June 22: Bear commits $3.2 billion in secured loans to bail out its High-Grade Structured Credit Fund, says company's troubles are "relatively contained."
• July 17: Bear tells clients that the assets in one of the troubled funds are essentially worthless, while those in the other are worth 9 percent of their value at the end of April.
• Aug 1: The two funds file for bankruptcy protection and the company freezes assets in a third fund.
• Aug 5: Co-President and Co-Chief Operating Officer Warren Specter resigns. Alan Schwartz becomes sole president. CFO Molinaro takes over co-COO role.
• Aug 6: Bear sends letters to clients reassuring them the company is financially sound.
• Sept. 20: Bear reports 68 percent drop in quarterly income. The company's accounts slipped by $42 billion between the end of May and the end of August.
• Nov. 14: CFO Molinaro says Bear will write down $1.62 billion and book a fourth-quarter loss.
• Nov. 28: Bear lays off another 4 percent of its staff, two weeks after cutting 2 percent of its work force.
• Dec. 20: Bear takes $1.9 billion write-down. CEO Cayne says he'll skip his 2007 bonus.
2008
• Jan. 7: CEO Cayne retires under pressure. Schwartz takes over.
• Mid-January: Financial stocks swoon as economists predict the U.S. economy will slip into recession. President Bush unveils a $150 billion stimulus plan.
• Mid-February: Subprime woes spread to a broad range of assets, including certain kinds of municipal debt.
• March 10: Market rumors say Bear may not have enough cash to do business.
"There is absolutely no truth to the rumors of liquidity problems that circulated today in the market," Bear says.
• March 12: Schwartz goes on CNBC to reassure investors his company has enough liquidity and he is "comfortable" it turned a profit in the fiscal first quarter.
• March 14: The federal government and JPMorgan Chase & Co. bail out Bear. The company says it sought the emergency funding after realizing it would not be able to keep up with a spike in demand from lenders.
• March 16: JPMorgan announces it has acquired Bear Stearns for $2 per share, or about $236 million.