Reuters - INSTANT VIEW: JP Morgan to buy Bear, Fed cuts discount rate

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INSTANT VIEW: JP Morgan to buy Bear, Fed cuts discount rate

Monday, Mar 17, 2008 2:13AM UTC

NEW YORK (Reuters) - JPMorgan Chase & Co <JPM.N> said on Sunday it would buy stricken rival Bear Stearns <BSC.N> for just $2 a share in an all-stock deal valuing the fifth largest investment bank at about $236 million.

In a surprise move to stem the fast-spreading debt crisis, the U.S. Federal Reserve also lowered the discount rate it charges on direct loans to banks to 3.25 percent, effective immediately, and announced a new lending program under through it which will lend to other big financial firms.

U.S. stock index futures <SPc1> gained on initial news of the Fed moves but then fell sharply on Sunday evening as investors worried that fallout from a global credit crunch will continue to spread, damaging more banks and undermining the financial system.

Asian stocks also fell while the dollar sank to a record low against the euro <EUR=> and a fresh 12-year low against the yen <YEN=>. Treasuries <TYv1> climbed and Gold <XAU=> hit a record high as the Fed move failed to calm panicky investors.

To read all stories on Bear Stearns, click on <BSC.N>, for all stories about the Fed moves, click on <FED>

GREG ORRELL, PORTFOLIO MANAGER OF THE $165 MILLION OCM GOLD

FUND IN LIVERMORE, CALIFORNIA, ON RATE CUT:

"You don't fight the inflationary implications. That's not the battle of the day. You'll worry about that later ... The battle of the moment is trying to maintain the financial system and not having a complete break down. That's where we're at. You're having a run on confidence."

"We really don't have enough transparency in the financial system to have confidence ... We still have no understanding of how structured debt products and their derivatives will play out."

"Gold is still going to find broader participation ... It is certainly going to find some strength through the week."

MARK PERVAN, SENIOR COMMODITIES ANALYST, ANZ:

"The Bear Stearns announcement highlights the risks facing the banking sector as the reporting season gets going. I think a lot of investors are parking money in gold.

"Investors will want to move their money as far from the United States as possible and Australian and Asia resource stocks might be a good play."

Earlier comments:

EMANUEL WEINTRAUB, MANAGING DIRECTOR OF INTEGRE ADVISORS IN

NEW YORK:

ON BEAR STEARNS: "I think its scary for what it says about the value of financial assets, if a company is worth only a small percentage of book value. But what we need to see is that counterparties are being stopped from failing and this deal does that. The futures falling is a knee-jerk reaction. This deal had to happen, and JPMorgan is the best candidate for this because their capital position is stronger and their sources of funding is stronger. I do think this is the best possible scenario for financial markets."

ON FED DISCOUNT RATE CUT: "I guess the Fed cutting the discount rate is more of the same, they're trying to boost liquidity, but there's no sense, that this last cut in the discount rate will change anything at all."

HIROSHI ARANO, ADVISER, MIZUHO ASSET MANAGEMENT, TOKYO:

"They don't have an impact big enough to change the negative market mood. The discount rate cut was only 25 basis points, and the Bear Stearns move simply averted the worst case.

"For the Japanese market to reverse the fall, we have to wait for the end of the Fed's rate cut cycle, meaning the end of the U.S. economic slowdown. Japanese stocks are seen by foreign investors as sensitive to U.S. economic cycles."

MITSUSHIGE AKINO, CHIEF FUND MANAGER, ICHIYOSHI INVESTMENT

MANAGEMENT, TOKYO:

"These are quite speedy responses by the U.S. authorities. Quick measures like these make investors wonder if it is all right to keep on selling (stocks and the dollar).

"We are entering a phase where we need to think about potential risks of just sticking to the selling side. These developments should have some effects of dulling downward momentum, although the effects do not seem to have emerged yet."

HIDEKI HAYASHI, CHIEF ECONOMIST, SHINKO SECURITIES, TOKYO:

"The Fed's discount rate cut is nothing more than a quick-fix policy and may not be taken as a much of surprise by investors after the acquisition of Bear Stearns."

"The string of reports about Bear Stearns had a huge impact on investor confidence as credit markets have broken down."

SEAN FENTON, FUND MANAGER, JENKINS INVESTMENT MANAGEMENT,

SYDNEY:

"Obviously, Bear Stearns was hit by a crisis of confidence and bit of a liquidity run, so they are gone. The Fed has just backed JP Morgan to buyout Bear Stearns. That is sort of consolidation. The Fed stepping in to provide support might give a degree of support to the market but it is hard to see huge amount of confidence coming back into the financial sector in the short-term."

STEPHEN ROBERTS, CHIEF ECONOMIST, LEHMAN BROTHERS, SYDNEY

"The cut in the discount rate suggests that the Fed is trying to narrow the gap with the cash rate and make it less expensive for borrowing funds. But risk flares will continue and the U.S. dollar will weaken as write-offs in the problem areas are looking up. Irrespective of the decision on Sunday, I think the Fed will do what it has to do on Tuesday with regard to the cash rate (at its scheduled meeting to review interest rates).

"Bonds will benefit, but the fact that the U.S. dollar is under pressure and gold is surging suggests a loss of face for some currencies.

"The Bear Stearns acquisition is a back-stop move and I think the credit crunch has still some way to go and there would be a few more months of strife ahead. The U.S. economy is weakening and there is no point being impatient about it."

DAVID COHEN, ECONOMIST AT ACTION ECONOMICS, SINGAPORE

"The Bear Stearns development was anticipated but it's still a source of nervousness for the markets. The fear is how many more skeletons in the closet are still there in the global credit markets?"

On Fed rate cuts and liquidity initiatives: "This is another effort by the Fed to calm things down, but the cloud on the horizon is just how much more of these credit issues are still out there. And we won't know until we see the U.S. housing market bottoming out.

"The Fed can try to smooth out the availability of credit but as long as the fear dimension is in the market, it is difficult to assure the availability of bank credit."

"The big question is what will be the effort on the real world economy. For now that is still being supported by healthy export demand from China and the oil producing countries.

ON FED MOVE

CHRISTOPHER THORNBERG, ECONOMIST WITH BEACON ECONOMICS, LOS

ANGELES

"The Federal Reserve's whole motivation at this point is to prevent bad debt from affecting good debt through a traditional run on the bank," said "The only way to prevent this is for the Federal Reserve to come into the market and be the lender of last resort."

MADELINE SCHNAPP, DIRECTOR OF MACROECONOMIC RESEARCH AT

TRIMTABS INVESTMENT RESEARCH, SANTA ROSA, CALIFORNIA

"I would have been surprised if the Fed hadn't (moved) given the turmoil in the financial industry and the events that emerged with Bear Stearns last week .... If they hadn't, for the equities market it would have been all over but for the crying."

CRAIG JAMES, CHIEF EQUITIES ECONOMIST, COMMSEC, SYDNEY

"Desperate times need desperate measures. The Federal Reserve is doing what it takes to restore stability and it means cutting the discount rate on a Sunday night in the U.S., then so be it.

"The fact that the Federal Reserve is responsive has got to be comfort to investors. There may be more bad news out there but investors should take the view that the Fed is not going to sit idly by."

KUMAR PALGHAT, MANAGING DIRECTOR, KAPSTREAM CAPITAL, SYDNEY

"It's a short-term measure. They are using all the tools they can and I don't expect any market rebound."

ON JP MORGAN/BEAR

KOSUKE HANAO, HEAD OF FOREX SALES, HSBC, TOKYO

"Market players are afraid that there will be the second and third Bear Stearns out there."

CRAIG JAMES, CHIEF EQUITIES ECONOMIST, COMMSEC, SYDNEY

"The fact that this transaction looks like it has been stitched up very, very quickly shows the urgency that the Federal Reserve had applied to this and no doubt that it sat down with the parties to ensure that the situation can be attended to straight away."