J.P. Morgan Raises Its Offer for Bear Stearns

Steven Raphael, a broker with Bear Stearns, enters the company headquarters on Monday, March 17, 2008 in New York. JP Morgan Chase said Sunday it will acquire rival Bear Stearns, a stunning collapse for one of the world's largest and most storied investment banks. (Mark Lennihan - AP)

The original deal was so urgently assembled that some of those responsible for putting the offer together did not sleep for days or camped out in their offices, according to people involved in the negotiations. Normally, the due-diligence review for a buyout of that magnitude takes four to five weeks. J.P. Morgan had 36 hours.

Almost since the ink was dry, there were discussions between the banks involved and the New York Fed about adjusting the terms. Throughout last week, Dimon was also sharply criticized by Bear Stearns shareholders, executives and managers, who accused him of swooping in like a vulture to snatch up their beleaguered firm.

Negotiations proceeded along two separate but related tracks. One set of talks, between J.P. Morgan and Bear Stearns, was over the sale price. The other, between J.P. Morgan and the New York Fed, was over how much the government could reduce its guarantee.

On Friday, with no one else willing or able to buy Bear Stearns, its executives offered Dimon the 39.5 percent stake. That "really started the action," said a person involved in the negotiations. In return, Dimon agreed to raise the buyout price.

J.P. Morgan and Bear still needed the Fed's acquiescence to reopen negotiations. New York Fed President Timothy F. Geithner, with support from colleagues on the Fed Board of Governors in Washington and top officials at the Treasury Department, used that as leverage to negotiate the new deal.

The Fed worked out an agreement that would allow it to keep all the profit if it sells Bear's risky assets for more than $30 billion. And the concession by J.P. Morgan to take on the first $1 billion in losses significantly reduces the risk that the central bank will take a loss because Fed leaders expect the portfolio's ultimate sale to be within a few billion dollars of the $30 billion estimate.

After a weekend-long scramble to iron out the details and more sleepless nights, a new agreement was fashioned early yesterday. The Bear Stearns board approved it after 8 a.m. The new deal is valued at $2.31 billion, according to Washington Post calculations.

Some analysts were still concerned about the risk to taxpayers.

"I do think the Fed was correct in a belief that the fall of a domino the size of Bear Stearns would have precipitated an implosion of the financial system," said Ball, the Sanders Morris Harris chairman. He added that the Fed is still putting taxpayers at risk and "will take a good deal of political heat for it," including in congressional hearings that are examining the Fed's exposure to Bear Stearns securities.

Traders said they were still worried about the housing and mortgage markets, which may be more fundamental to the health of the financial system than the status of Bear Stearns is.

"The entire foundation of the mortgage-backed-security market depends on home prices, and if they continue to decline the problems in the credit markets are going to continue," said Charlie Smith, chief investment officer at Fort Pitt Capital Group.

The National Association of Realtors delivered a bit of good news on this front yesterday. The group said sales of existing homes rose by 2.9 percent in February, to a seasonally adjusted annual rate of 5.03 million units, It was the biggest increase in a year, and particularly surprising because most Wall Street analysts had expected a slight decline.

Still, the median home price fell by the largest percentage on record. And a bad reading on housing prices, which is expected today, could make the good feelings about the Bear Stearns buyout short-lived, Smith said.

Staff writer Alejandro Lazo and staff researcher Richard Drezen contributed to this report.