Bear Stearns bail out becomes buy out

It was only Friday that JP Morgan was helping to bail out Bear Stearns with the US Government's backing. Now it apparently has decided that it would be better to acquire the company for far less, just $236 million. Its only assets at this point are probably its office buildings and furniture, as its debts far outway any value of the company. The purchase price equivalent to $2 a share represents a discount of 93% from Friday's close, which itself was already down 47% from Thursday.

Bear Stearns got into liquidity problems when two hedge funds failed last summer and their bread and butter mortgage backed securities suffered huge losses. Banks can take a quick tumble when investors and the financial communites lose faith and begin to pull their money out or stop offering lines of credit, as the only real assets a bank holds are the loans it gives out and the only source of liquidity are investments people make in it. When those both turn sour, things can go bad real quick. Bear Stearns' share price dropped greater than 97% since last Monday's open.

Bear Stearns was less diversified than some of the other financial institutions, but there is no doubt the whole financial sector will feel the pain on Monday. Expect huge losses that drag down the whole market on Monday. This all but guarantees a rate cut of the Fed funds rate of 100 points this Tuesday, with rumors it could go as high as 200 points. It already cut the discount rate 25 points this weekend.

Bear Stearns is feeling the same pain as the investor who was too leveraged in real estate and didn't diversify their portfolio. Only the private citizen won't even be offered the $0.67 on the dollar Bear is getting.