What Does Morgan-Stearns Buyout Mean for Consumers?

News that JP Morgan Chase would buy troubled Bear Stearns for a basement price stunned Wall Street. But many Americans were also stunned that the U.S. Federal Reserve took other steps to prevent more damage to the struggling financial institution. Finance expert Alvin Hall updates listeners on the latest financial news, and what it means for consumers.

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MICHEL MARTIN, host:

I'm Michel Martin, and this is Tell Me More from NPR News. It's time for the Money Coach, where we check in with our personal finance guru, Alvin Hall. Economy watchers have their eyes on the Federal Reserve Board today. Many believe the Fed will order a big cut in the Federal Funds Rate. That's on top of the emergency rate cut on Sunday when the Fed also backed a deal that allowed JP Morgan Chase to buy the troubled financial institution, Bear Stearns, for a bargain price.

But we want to know what this all means to us, the regular people. Alvin, help!

ALVIN HALL: Oh, help is what we all need! Who would have ever thought that when we first heard about the subprime mortgage crisis, that one of the knock-on, or domino effects, would be the demise of the venerable Bear Stearns? I should tell everybody that I'm a client of Bear Stearns.

(Soundbite of laughter)

MARTIN: Yes, you should. Well, what does this mean to you?

HALL: It made me nervous, but also I know that Bear Stearns has insurance so that if it had declared bankruptcy, they have what's called SIPC insurance, which is Securities Investor Protection Insurance, which protects you up to half a million dollars. And if your account is above that, they have additional insurance to protect you. I think it's up to 10 million, 500,000 dollars per account.

MARTIN: Well, briefly explain what the Fed did and why they did it.

HALL: Well, we have to start with how Bear Stearns and most financial institutions run their businesses. Most of them do not sit on large amounts of cash. Instead, they loan out or pledge their securities to get in cash. And they borrow against anything that's sitting on the books. It would be as if you and I, Michel, ran our lives by pledging our houses to a bank to get in money and then repledging it every 30, 60,or 90 days to get in more money to run the business.

But what happens if your house, or in the case of Bear Stearns, the securities are mortgaged backed securities and other securities, are declining in value? Then, the people who take your securities and pledge will say, well, we want our money back now! And if you can't pay the money back now, then we're going to sell your securities in the market place. That combined with the fact that Bear Stearns' credit rating was lowered by all of the rating agencies, so the securities didn't have any value.

So now, the Fed was sitting there with an organization on the verge of bankruptcy. What does the Fed have to do?

MARTIN: Yeah, why, and why, for example, because remember these are the same folks who tell us, every boat on its own bottom. You know? Don't get into loans you can't afford. So explain to me why is the federal government involved in, essentially, a bailout. It's a bail out, isn't it?

HALL: It is absolutely a bail out. Bear Stearns is such a huge company. We think of it as a brokerage firm, but it's also involved in prime brokerage. This is loaning money to hedge funds and helping them reconcile trades all around the world. It's also involved in clearance and settlement of trades, not only in the U.S. but around the world. And it's also involved in real estate transactions for different entities around the world. So it's a huge organization!

If it fell, the knock-on effect was absolutely unpredictable. So the Fed said, rather than let this happen, we'll step in and bail out this company.

MARTIN: Gretchen Morgenson of the New York Times wrote about this over the weekend and suggested that Bear was a major promoter of the most questionable subprime loans. Wouldn't that suggest that they were some of very people who contributed to the crisis they are now in?

HALL: Oh, there's no doubt that every company that created these subprimes mortgages are absolutely culpable here, but the government also looks at the size of these companies. And if you want to think them as sort of big octopuses with tendrils reaching out way into the world, so if you let the octopus die, who knows where that tendril reaches beyond the horizon, that there'll be a knock-on effect. And the U.S. government now says that these octopi are too big to die. They're too big...

MARTIN: So there really is such a thing as too big to fail?

HALL: That's exactly what you see at this point.

MARTIN: So never the less, JP Morgan Chase did buy Bear Stearns at a steep discount...

HALL: I think you can call it a fire sale price.

(Soundbite of laughter)

MARTIN: So does this really have any benefit then? Is there really any beneficial effect?

HALL: Well...

MARTIN: Is there really that much difference between going out of business and being bought at such at a bargain basement price?

HALL: Well, people would argue, who own shares in Bear Stearns, that there is a difference. A lot of people are saying, you know, if we let the company go bankrupt and liquidated the company, we'd still end up with more money than we're getting in this two-dollar deal. The market place says this two-dollar deal protects the overall market. There's no doubt that JP Morgan Chase has got a steal. What they're probably going to do is to keep the core businesses that they're interested in, and then they'll sell off all the assets and recoup their money.

MARTIN: So I think what most people want to know is what does that have to do with me?

HALL: Well...

MARTIN: I mean, if you're a Bear Stearns shareholder, that's one thing. But let's assume most of us aren't.

HALL: If you have money in the stock market at this point, it's time to sit down and determine if you can tolerate this risk. Maybe it's time to move some of your assets into cash, and sit on cash. If you're continuing to contribute to your 401(k) program, rather than letting it go into the mutual fund, put it into a money market account. Do something a little bit more conservative with your money. I have a feeling that this turmoil is going to last a lot longer than anybody is willing to admit.

Some people who can absorb this risk will look back down the years and say I was really smart. Look at how well I'm retired. Some of us will say I was comfortable.

MARTIN: OK. Well, hopefully, well, spring is coming. That's something to look forward to, right?

HALL: Yes. Spring is coming, and we can all go out and sit in the sun, feeling a little bit poorer.

(Soundbite of laughter)

MARTIN: OK. Alvin Hall joined us from our bureau in New York. Alvin, thank you.

HALL: Thank you, Michel.

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JP Morgan Snaps Up Bear Stearns for $2 a Share

JP Morgan Chase will acquire the troubled investment bank Bear Stearns at the fire-sale price of $2 a share, a deal quickly approved over the weekend by the Federal Reserve, which aims to keep the financial giant from collapsing from its losses in the subprime mortgage crisis.

The approval came as the Fed also took the extraordinary step Sunday of lowering its emergency lending rate to financial institutions by a quarter-point to 3.25 percent.

The moves, days before the Feds scheduled meeting Tuesday, smacked of desperation to many investors, stirring fear worldwide that other banks with sizable exposure to troubled credit markets could also implode. Stocks fell sharply in Asia and Europe, and oil prices set fresh records in Asian trading.

Stunned dealers and traders at Bear Stearns turned up for work Monday to find the value of their stock options in tatters and the future of their jobs up in the air. Just last year, Bear Stearns stock was trading at $172 a share, although it had plunged to $30 in recent days amid market rumors that the bank was heavily exposed to subprime losses.

JP Morgan Chief Financial Officer Michael Cavanagh did not say what would happen to Bear Stearns' 14,000 employees worldwide, or whether the 85-year-old Bear Stearns name would live on after surviving the Great Depression and a slew of recessions.

JP Morgan 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' midtown Manhattan headquarters.

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