JPMorgan Buys Bear Stearns in Fire Sale

Updated from 8:54 a.m. EDT

JPMorgan Chase(JPM Quote) announced Sunday that it will buy Bear Stearns(BSC Quote) in a stock swap that values the troubled investment bank at $2 a share.

JPMorgan Chase will exchange 0.05473 shares of its common stock for each share of Bear Stearns.

News of the deal, and subsequent moves by the Federal Reserve to address the liquidity problems facing the credit market were greeted with heavy selling overseas, as Asian markets fell across the board and early trading in Europe also saw losses.

The Fed's cutting of the discount rate led to heavy selling of the dollar also, as the greenback traded as low as $1.5905 vs the euro, before dropping back to 1.5761.

The purchase ends 85-year-old Bear Stearns' run as an independent investment bank.

Beyond Bear's Collapse: Who's Next?

JPMorgan said it would immediately guarantee the trading obligations of Bear and its subsidiaries, which may provide some relief to market participants who feared that a collapse of the investment bank could take down its trading partners. Still, the speed of Bear Stearns' fall shocked many market participants and made them wonder whether other firms are facing similar problems.

The Federal Reserve is providing special financing for the deal, agreeing to fund up to $30 billion of Bear Stearns' less liquid assets. (Also Sunday, the Fed cut the discount rate and extended discount-window borrowing to securities dealers.)

Sources within the firm say that there is little to no communication on Monday. The legal department has directed that no new business to be initiated and that other standing policies and procedures remain in place. Employees are expected to continue working, although managers say that it's very difficult to keep people focused, the sources say.

Major layoffs at the firm are expected, insiders say. Speculation is that JPMorgan will keep the clearing operation, the asset management group, the legal department and maybe a couple of other areas. But otherwise, most of the trading and sales would just be overlap. Counselors are on site, available for people to discuss the uncertainty surrounding the firm and their jobs.

The deal price is a small fraction of the levels at which Bear Stearns' shares were trading just last week. The stock plummeted $27.00, or nearly 50%, Friday to close at $30. The catalyst was Bear's disclosure that it had serious liquidity problems that necessitated a rescue by JPMorgan Chase and the New York Fed.

Shares of JPMorgan Chase lost $1.57, or 4.1%, Friday to close at $36.54, but they rose 3.9% to $37.96 Monday. Bear Stearns was quoted down 88% at $3.70.

Bear's senior managing directors and managing directors that were forced to take some of their compensation in the form of restricted stock and stock options have seen their net worth collapse overnight. But they question whether the company that is heavily employee-owned will accept the $2 a share offer. Reports price the building alone at $8 a share.

JPMorgan Chase to Purchase Bear Stearns Cramer: The Past Is a Game Plan for the Present Fed Cuts Discount Rate to 3.25% Who Traded 55,000 Bear $30 Puts Tuesday? Altucher: Stocks I'd Buy in a Recession Bear's CEO Didn't Lie Fed Poised to Slash Rates Further Amid Crisis Should You Own Financials Right Now? Beyond Bear's Collapse: Who's Next?

Bear Stearns was a big player in the subprime mortgage boom earlier this decade, but saw the value of its mortgage-linked paper slump after the market for those securities dried up. Last summer, two of its hedge funds went belly up after making big bets on subprime mortgages.

The investment bank found itself facing a dangerous cash crunch late last week after its clients and counterparties, smelling trouble, began what amounted to a run on the bank. Just days earlier, CEO Alan Schwartz had dismissed rumors of liquidity problems.

Even though JPMorgan Chase agreed to shore up Bear Stearns' finances in the short term on Friday -- through a 28-day secured loan facility backed up by the New York Fed's discount window -- regulators and other Wall Street managers had remained concerned that Bear Stearns' woes could have a catastrophic domino effect on other financial firms and the credit markets in general.

Know What You Own: Bear Stearns operates in the financial services industry, and some of the other stocks in its field include Citigroup (C Quote), Goldman Sachs (GS Quote), Morgan Stanley (MS Quote), Merrill Lynch (MER Quote), Bank of America (BAC Quote) and Lehman Brothers (LEH Quote). These stocks were recently trading at ($18.14, -8.29%), ($142.49, -9.16%), ($35.89, -9.25%), ($37.55, -13.70%), ($34.25, -4.03%) and ($25.59, -34.92%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.