Bear fire sale sparks financial rout

17/03/2008 - 16:05

By Jack Reerink

NEW YORK (Reuters)- A fire sale of Bear Stearns Cos Inc stunned Wall Street and pummeled global financial stocks on Monday on fears that few banks are safe from deepening market turmoil.

President George W. Bush assured the world that the United States was "on top of the situation" in financial markets as the U.S. Federal Reserve geared up for a deep cut in interest rates on Tuesday to blow money into the fragile financial system.

Staff turning up for work at Bear Stearns' Manhattan headquarters were welcomed by a two-dollar bill stuck to the revolving doors -- a spoof on the bargain-basement price of $2 per share that JPMorgan Chase is offering for the Wall Street firm. A hopeful Coldwell Banker realtor was hawking cheap apartments to employees who saw the value of their stock options go up in smoke.

The combination of the speedy sale of Bear Stearns at a rock-bottom price and the Fed's offer to extend direct lending to securities firms for the first time since the Great Depression highlighted just how hard the credit crisis has hit Wall Street.

And it scared market players worldwide.

"If you get a crisis of confidence in the wholesale banking space and something the size of Bear Stearns could go under, then people start to panic. You get a real fear factor," said Simon Maughan, analyst at MF Global in London.

The grim mood spread beyond Bear, Wall Street's fifth-biggest bank, as investors bailed from rival Lehman Bros for fear it would be next to face a cash crunch. Lehman shares plummeted 20 percent and briefly touched a 6-1/2 year low. Hedge funds told Reuters on Friday they were still doing business with Lehman and a spokesman said the firm was in good shape.

The financial world is more interconnected than ever and the merest whiff of trouble can result in a run on a bank: trading partners and funds pulling money and calling in loans. Indeed, Bear's fall shows how fast things can change on Wall Street.

Shares of European banks -- including UBS in Switzerland, HBOS in Britain and SocGen in France -- fell more than 10 percent as concern swept markets that the value of risky assets needs to be marked down even further.

In Asia some of Japan's biggest banks also fell, with Mitsubishi UFJ Financial Group <8306.T>, Mizuho Financial Group <8411.T> and Sumitomo Mitsui Financial Group <8316.T> down 3 percent or more.


Bankers around the world were already fretting about job losses as the prospect of recession in the United States grips financial institutions.

Bear Stearns, roughly 30 percent owned by its staff and proud of its above-average level of inside ownership, employs 14,000.

"The valuation is virtually nothing," said a Singapore-based Bear Stearns employee. "It is indeed rock bottom. We have tanked. It's very, very sad. Everyone is in mourning."

The mood among U.S. staff was solemn. "My job's been eliminated," said one male employee arriving for work in New York. The employee, who declined to be identified, said he had been given 90 days' notice.

Bear Stearns was caught in a tailspin after speculation swirled last week that it faced problems and its cash reserves were drained by fleeing customers.

JPMorgan picked it up for just $236 million -- 1.2 percent of Bear's market value a little more than a year ago -- although the bank estimated the total price tag at $6 billion to account for litigation and severance costs.

A lot of people lost a lot of money: Entrepreneur Joseph Lewis, a reclusive Englishman who made a fortune trading currencies, bought a stake of about 10 percent in Bear and stands to lose around $1 billion.

There is a clear crisis of confidence across the financial sector, and other measures by the Fed to aid liquidity, announced on Sunday, are unlikely to reassure investors enough, analysts said.

Pressure on banks' capital positions it also likely to intensify and is expected to prompt many to seek further cash injections from sovereign wealth funds.

But the jittery mood means even well positioned banks may be reluctant to take advantage of acquisition opportunities, bankers and analysts said.

"I think M&A is too difficult now," a London banker said. "This is about catching a falling chainsaw. It's not just about cutting yourself if you get it wrong, it's about losing a limb."

Bear could have attractive assets for rivals such as Barclays seeking to expand in the United States, but analysts said JPMorgan would be unlikely to sell any prized Bear assets such as its prime brokerage capabilities, clearing services, equities platform and energy operation.

(Writing by Jack Reerink; Reporting by Umesh Desai in Hong Kong; Steve Slater, Olesya Dmitracova and Mathieu Robbins in London; Herb Lash and Kristina Cooke in New York; Editing by David Holmes and John Wallace)

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