JPMorgan Chase To Buy Bear Stearns For $2/Share

Despite fears of a "Black Monday" on Wall Street, financial company stocks bore the brunt of flagging investor confidence after JPMorgan Chase & Co. (JPM) agreed to buy Bear Stearns Cos. (BSC) at a massive discount and the Federal Reserve stepped in with an emergency discount rate cut.

The Dow Jones Industrial Average ended up 21 points and the dollar came off its overnight lows.

THE VIEW FROM WALL STREET: JPMorgan's stock was up $3.51 to over $40. Conversely, Bear Stearns' stock fell another $25.19 to $4.81 following Friday's initial free-fall. Elsewhere among the the big Wall Street investment houses, Lehman Brothers Holdings lost about 20% to $31.10, following a decline of 15% Friday; Merrill Lynch and Morgan Stanley fell about 10% and Goldman Sachs Group slid about 8%. Citigroup shares fell about 6%. Investors are weighing both the value of financial stocks after Bear sold for only $2 a share - and whether the problems which brought down Bear can spread.

BEAR'S DEMISE: JPMorgan Sunday night announced it would purchase Bear for an astounding $2 a share or about $236 million. The investment giant had a stock market value of $20 billion in January 2007. The purchase also was only made after Federal Reserve agreed to accept as collateral up to $30 billion in Bear Stearns market positions.

THE FED STEPS IN: Almost simultaneously with the JPMorgan purchase, the Federal Reserve sought to increase liquidity to the credit-crunch seized financial markets.

The Fed lowered its discount rate by 25 basis points to 3.25%. It also opened up the discount rate to primary dealers and expanded the length of such loans to 90 days from 30 days. The Fed also significantly broadening the kind of securities it will accept as collateral.

TALK OF LAYOFFS: JPMorgan Chase & Co.'s takeover plans for Bear Stearns Cos. include cutting more than half of Bear's 14,000-member staff, CNBC's Charlie Gasparino reported Monday, citing sources at JPMorgan.

The layoffs are anticipated over the "next couple months," Gasparino said.

UP NEXT FOR THE FED: A notable group of top economists - among them Goldman Sachs (GS) and Citigroup (C) - expect the Federal Reserve's aggressive approach to saving financial markets will be a joined by another bold salvo Tuesday - a 100 basis point cut in the central bank's overnight target rate at its regularly scheduled meeting.

THE MARKETS: U.S. stocks were mixed Monday as the near collapse of Bear Stearns sent investors fleeing from the financial sector to the safety of government debt and defensive stocks.

The Dow Jones Industrial Average finished up 21 to 11972, with JPMorgan lending strength. The Standard & Poor's 500 fell 11 to 1276, and the tech-heavy Nasdaq Composite slipped 35 to 2177.

The dollar fell to a new 13-year low against the yen Monday and hit another lifetime low against the euro. But the greenback rebounded later in the session as risk averse investors reduced their exposure to higher-yielding currencies and parked their funds back into dollar-based assets as they began to wait for the Fed's rate decision Tuesday.

Monday afternoon, the euro was at $1.5725 from $1.5673 late Friday while the dollar was at Y97.12 compared with Y99.30. The euro was at Y152.73 compared with Y155.59, according to EBS. The U.K. pound was at $2.0023 from $2.0213, and the dollar was at CHF0.9879 compared with CHF0.9991 Friday.

Five-year Treasurys lead rally Monday afternoon, partly benefiting from safe- haven flow and partly boosted from mortgage-related buying, traders say. Yield on five-year notes dips to lowest since mid 2003 as demand increases from mortgage investors who have to buy Tsys to extend duration as lower rates raise risks of refinancing activities and increase the uncertainty of cash flows. The five-year note is up 23/32 to 102 20/32 to yield 2.18%, the two-year note is up 6/32 to 101 10/32 to yield 1.32% while the 30-year bond is up 1 3/32 to 101 18/ 32 to yield 4.28%.

Panic buying of federal-funds futures sent market odds soaring for the Federal Open Market Committee to impose a 100 basis point or full percentage point drop in the key short-term rate to 2% at Tuesday's meeting.

At Monday's settlement, the April fed-funds futures contract also priced in about a 22% chance for an even steeper cut to 1.75% at Tuesday's session. Friday, the April contract had priced in about a 52% chance for a 2% funds rate, with no expectations for a 1.75% rate.

WHAT THEY SAID:

"The financial logic is compelling," said J.P. Morgan Chief Financial Officer Michael Cavanagh on the deal to acquire Bear.

"We haven't signed any formal agreement, we haven't paid any money and we can't guarantee reaching a final agreement in the future," China's Citic Securities said regarding a deal it reached in October to take a 6% stake in Bear Stearns with an investment of $1 billion, while Bear would take a 2% stake in Citic with a $1 billion investment.

U.S. Treasury Secretary Henry Paulson said the Bush administration is "quite pleased" with moves the Federal Reserve has made to bolster the financial system.

Paulson said a group of administration officials briefed President George W. Bush on what is happening in financial markets. in the wake of J.P. Morgan Chase & Co.'s (JPM) agreement to buy Bear Stearns Cos. (BSC), and the Fed's moves to boost liquidity in the capital markets.

"He was generally quite pleased with the actions that were taken, as are we," Paulson said.

The financial crisis that is gripping the U.S. could turn out to be the worst since World War II, former Federal Reserve chairman Alan Greenspan said in remarks published Monday.

"The current financial crisis in the U.S. is likely to be judged in retrospect as the most wrenching since the end of the Second World War," Greenspan said in a Financial Times commentary.

Amid heightened concerns over the state of the world financial system, U.S. President George W. Bush gave assurances Monday that capital markets are working smoothly, adding that the U.S. is "on top of the situation."

"One thing is for certain, we're in challenging times," Bush told reporters after meeting with his top economic aides. "But another thing is for certain - that we've taken strong and decisive action.

U.S. markets have been "less disastrous today" than feared, note analysts at Ried Thunberg in New York, after investors last night prepped for a volatile day as Asian stocks plunged on the Fed announcements. "Confusion, not confidence, explains the lull in selling" though, Ried Thunberg analysts said. "Nobody feels sure about how the credit crunch evolves from now."

The Federal Reserve-orchestrated rescue of Bear Stearns Cos. (BSC) and the emergency U.S. rate cut go in the right direction and will help avoid systemic disruptions in financial markets, International Monetary Fund Managing Director Dominique Strauss-Kahn said Monday.

"What the Fed did goes in the right direction, and it's a signal that will help restore confidence in markets," he said.

Oil-rich Mideast investors will be unable to ease a rout on global markets following the collapse of U.S. banking giant Bear Stearns Cos (BSC), the head of one of the region's largest investment funds said Monday.

"We're digesting everything that is going on in the markets but it's beyond our control to stop it," Sheik Sultan Ahmed bin Sulayem, Chairman of Dubai World, a Dubai-government funded investment company that owns the world's fourth-largest port operator, told Zawya Dow Jones in phone interview Monday.