On Friday the US Federal Reserve rushed through a bail out (for an unknown amount of money) of America’s 5th biggest investment bank, Bear Stearns. For the third time in a week the US Federal Reserve has acted to stop the financial system from imploding.
Authorities are struggling to contain what is now the worst financial crisis the world markets have seen since the 1929 Depression. Five banks have now been rescued around the world since the credit crisis erupted last June when two Bear Stearns hedge funds failed, thanks to their leveraged investments in subprime mortgage related credit securities and bonds.
With an estimated $US43 billion in assets like bonds, corporate debt, subprime mortgages and related credit derivatives, Bear was just too big to let fail: it would have shaken the world financial markets to their core. The rescue will set off a push in the US for the wholesale regulation of the financial markets: one of the prime originators of the subprime and CDO mess has now had to be rescued by the US taxpayer. There is a small upsurge in protest at the Fed’s move.
This morning Australian time, with the approval of the Fed, Bear Stearns was sold to JP Morgan for just $US2 a share, valuing the company at just $US236 million compared to Bear’s stock-market value of about $3.54 billion at the end of Friday’s trade.
The bailout of Bear Stearns is a reminder that the credit rating agencies are the last to know, with the rest of us. There was Standard & Poor’s on Thursday reporting that losses from the subprime crisis were at the halfway point, and a day later, its crisis time as one of the major players in the subprime mess had to be saved.
Locally, the question is now whether Macquarie Group will be able to complete a pending deal with Bear Stearns.
Bear Stearns’ private equity arm announced the agreed acquisition of the Macquarie Group’s Macquarie Private Capital Group last month for almost $116 million.
It was it’s first direct investment in Australia and the deal was to be done by way of a scheme of arrangement. The question now is whether Bear Stearns will be allowed to use more than $100 million downunder when the parent almost collapsed on Friday. The deal is subject to approval by Australia’s Foreign Investment Review Board.
In the scheme of things at Macquarie, the money is not huge, but if the deal doesn’t complete it will raise a niggle of doubt in the minds of nervy investors already worried about macquarie’s business model and its exposure to the credit crunch and shaky markets.
Chairman Richard Shepphard, who is deputy chair of Macquarie Group, has 200,000 Macquarie Private shares, so if the deal doesn’t complete, he will miss out on a little sweetener.