At the start of 2007, Bear Stearns had a market cap of $US20 billion. After four days of fevered negotiations, rival investment bank JP Morgan bought it for just $US240 million, using Morgan shares, not cash.

The losses among shareholders have been enormous. But Wall Street investors liked the deal and pushed up the value of JP Morgan shares 11%.

It’s now clear that if it hadn’t been for the Federal Reserve’s support measures from Wednesday onwards, Bear Stearns would have collapsed on Thursday night, such was the run on the bank by nervous investors of all sizes, especially ones paid a lot of money not to be nervous. Deutsche Bank wouldn’t deal after charging a premium earlier in the week to do deals: other investors pulled out billions of dollars in cash and assets and went elsewhere.

For the last couple of days of last week, America’s fifth biggest investment bank was on life support as the Fed looked for a buyer.

For all its grubby boasting, JP Morgan needed the US taxpayer to underwrite the illiquid assets which troubled Bear Stearns — and which could have damaged JP Morgan and the rest of the banking industry — triggering another round of write-offs and losses and a loss of confidence.

US reports say JP Morgan had originally decided not to buy Bear Stearns because of risks associated with the latter company’s mortgage portfolios, but changed its mind when the Fed said it would provide that $US30 billion loan.

That meant the risks were substantially reduced, with one risk in particular all but eliminated for the time being: the of risk falling values for mortgages and other assets in a fire sale of Bear assets would have forced JP Morgan (and other banks) to cut the value of their holdings of similar securities, producing another round of big losses.

For Morgan, the impact would have been bigger than it seems: it last ruled off its books at December 31. Bear Stearns, Goldman Sachs Lehman Bros and Morgan Stanley ruled their accounts off at the end of February. There has already been a big fall in asset values, something which contributed to the failure of Bear Stearns. It had cut the value of its holdings by a reported $US2.5 billion, which JP Morgan would have had to assume.

As its write-downs so far have “only” totalled $US3.7 billion, that was a big loss to have to take onboard. But taking over Bear Stearns’ assets would have also forced JP Morgan to mark down its own holdings of similar assets by a similar amount under US accounting rules. That would have doubled the loss or more and made the acquisition too big a risk, until the Fed stepped in with its own loan offer.

So now JP Morgan gets a business with a value of perhaps $US7 billion and even after “merger costs” estimated by JP Morgan at $US6 billion, there’s $1 billion in net value it has bought for $US240 million, and revenues of around the same amount.

The losers include Jimmy Cayne, the bridge-playing absentee chairman whose $US1 billion worth of shares a year ago are now worth just $US22 million and Joe Lewis, a Foreign exchange dealer based in a tax haven in the Atlantic who paid upwards of $860 million for a stake in Bear Stearns, only to lose most of that in the bailout.