JPMorgan to pay $2 a share for the capital markets, investment-banking firm. JPMorgan Chase is using Federal Reserve money to buy Bear Stearns at a steep discount, according to a JPMorgan statement released today.

JPMorgan will pay $2 a share for Bear Stearns, whose stock ended trading on Friday at about $30 a share. A year ago, Bear Stearns' shares were trading at about $150 a share.

"The past week has been an incredibly difficult time for Bear Stearns," says Alan Schwartz, Bear Stearns' president and CEO. "This transaction represents the best outcome for all of our constituencies based upon the current circumstances."

Fragility

For Elizabeth Nesvold, managing partner of New York-based M&A consultancy Silver Lane Advisors, the Fed-funded transaction between JPMorgan and Bear Stearns is a stunning development.

"What is incredible is the fact that this horror story is based primarily on the perception -- not the reality -- that Bear was having liquidity issues," Nesvold writes in a email to FWR. "The take-away is how fragile the entire financial system is."

The Fed, with a view, apparently, to stemming runs on big-name financial institutions, is funding the transaction in part by traditional means through its "discount window" and partly via "special financing" whereby the central bank will fund up to $30 billion of Bear Stearns' less liquid assets.

Earlier last week, in another move seemingly calculated to shore up financial institutions shaken by mortgage-market meltdown, the Fed said it would start lending Treasury securities to primary dealers over 28-day terms (rather than overnight) and start lending backed by pledges of a broader range of instruments including mortgage-backed securities.

JPMorgan says it expects the deal with Bear Stearns "to be ultimately accretive to" its annual earnings.

Nesvold agrees. Once JPMorgan integrates the parts of Bear Stearns it wants to keep -- trading and asset management along with a few other pieces -- and sells the rest, she sees it putting more than $1 billion in JPMorgan's coffers.

The fates of Bear Stearns' private-client and wealth-manager custody businesses aren't yet known.

The transaction between JPMorgan and Bear Stearns is expected by the end of June 2008. -FWR

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