Goodbye, Bear Stearns

Goodbye, Bear Stearns
With Bear shareholders set to approve the buyout by JPMorgan Chase, it's the end of an era on Wall Street. But what does Jamie Dimon have planned next?

NEW YORK (CNNMoney.com) -- JPMorgan Chase should complete its historic bid for Bear Stearns Thursday, effectively closing one of the more dismal chapters in the annals of Wall Street.

Nearly two-and-a-half months after the extraordinary tie-up was revealed, Bear Stearns (BSC, Fortune 500) shareholders are widely expected to approve the proposed takeover at a special meeting.

The purchase, unveiled on a Sunday evening, not only heralded the end of the 85-year-old firm, but also came to represent just how vulnerable Wall Street had become as a result of the subprime mortgage meltdown and credit crisis.

At the time, Bear Stearns was on the brink of financial collapse. Short-term creditors refused to lend the firm any more money and simultaneously demanded repayment of outstanding debt.

Encouraged by federal regulators, including the Treasury Department and the Federal Reserve, JPMorgan (JPM, Fortune 500) originally agreed to buy Bear Stearns for $236 million, or just $2 a share, more than 90% below its closing price before the takeover was announced.

The move was done to help stave off a run on other investment banks and damage to the broader American financial system and economy. But the Fed's actions later drew plenty of criticism from lawmakers due to the central bank's willingness to bailout Wall Street at a time when thousands of Americans were losing their homes to foreclosure.

Beginning of the end

Cracks first appeared in Bear Stearns' hull last July following the implosion of two of the companies' hedge funds, which were heavily invested in mortgage-backed securities.

In the following months, Bear Stearns reported billions of dollars in writedowns, as did many of its Wall Street peers.

In August, the company ousted co-president Warren Spector. CEO James Cayne agreed to step down in January following much criticism of his leadership during the firm's financial crisis. That left Alan Schwartz at the firm's helm during its final days.

During the week of March 10, Schwartz was forced to contend with market rumors about Bear's underlying health. Despite securing a short-term loan from JPMorgan on Friday, March 14, the company's liquidity continued to deteriorate. Schwartz later said that if it hadn't found a buyer, Bear likely would have had to file for bankruptcy. The deal was announced on the evening of March 16.

Investors cried foul at the initial $2 a share offering. A week later, JPMorgan raised its bid to roughly $10 a share.

As part of the deal, the Federal Reserve Bank of New York agreed to take control of $30 billion of Bear Stearns' assets. Under the arrangement, JPMorgan would bear the risk of the first $1 billion of losses if the assets were to go bad, with the New York Fed covering the remaining $29 billion.

It also meant thousands of job losses for Bear Stearns workers. Last week, JPMorgan's Dimon confirmed that his firm would retain only 45% of the 14,000 individuals employed at Bear Stearns.

Forging ahead

As painful as the deal has become for many involved, the purchase so far is shaping up to be a savvy move for JPMorgan Chase.

Among other things, the New York-based bank will acquire Bear Stearns' prime brokerage business, a profitable division that services hedge fund clients.

At JPMorgan's annual shareholder meeting last week, CEO Jamie Dimon said he expected the tie-up to generate roughly $1 billion in after-tax earnings for JPMorgan by 2009.

But with that also come the possibility of headaches.

By acquiring Bear Stearns, JPMorgan exposes itself to lawsuits tied to Bear Stearns' subprime mortgage division as well as risks from Bear's derivatives business.

And given the continued deterioration in the housing market, there could be additional troubles in Bear's vast mortgage portfolio.

"Honestly, it's hard to tell," said Adam Compton, senior research analyst at RCM Capital Management, a San Francisco-based investment manager. "Frankly nobody from the outside has any idea what Bear's balance sheet looks like."

While the coming months will most likely be spent tying up the merger's loose ends, that may not necessarily stop JPMorgan from pursuing its long-rumored goal of acquiring a regional bank with exposure either in the South or along the West Coast.

The firm was reportedly close to a deal with Washington Mutual (WM, Fortune 500) last month, before the Seattle-based thrift spurned its bid, instead selling a $7 billion stake to an investment group led by the private-equity firm TPG.

And some JPMorgan investors may prefer to see the bank deal with the Bear Stearns merger integration first before moving on to even bigger deals.

CNN