Only Finance.com® - The Latest Victim of the Global Credit Crunch

Loans - The Latest Victim of the Global Credit Crunch

Bear Sterns, a major US bank has been bought out after suffering the effects of the global credit crunch.

JP Morgan Chase – a leading global financial services firm – has bought the bank for only $2 per share. The bank is the latest to have major funding problems because of the credit crunch and analysts fear more are to follow in the future. As Wall Street's fifth biggest bank, the news of the buyout sparked concerns about the overall effect the collapse would have on the financial market.

With backing from the Federal Reserve of New York, JP Morgan Chase – a leading global financial services firm – initially said it would provide emergency money to one of Wall Street’s biggest players for 28 days after the bank ran into trouble at the end of last week. Just a few days later, however, the firm has announced it will be buying the bank for 2% of its value in April last year. Currently, Bear Stearns is valued at only £236 million. Shares have dropped 98% since last April, when they were worth $158; by October, they were down to $117.

The bank found itself in deep water when it was hit by problems with its sub-prime mortgage lending and other banks would not lend money to it in the meantime. Last week, speculation was rife about news the bank did not have enough funds to conduct its daily business and on Friday, shares fell a further 46% to $30 when it was announced an emergency rescue package was going to be created. Due to a confidence crisis on the part of Bear Stearn's hedge fund clients, the bank was nearly pushed to insolvency as people rushed to withdraw their assets.

A deal was revealed on Sunday, where the Federal Reserve will be funding up to $30 billion of the bank's less liquid assets, while JP Morgan Chase has promised to meet all payments that are due to the bank's clients. Despite the $30 share value at closing on Friday, the deal between the Federal Reserve and JP Morgan Chase offered shareholders only $2 per share.

The news of the buyout has done nothing to quell the unease felt by investors, who fear the credit crunch is having worsening effects on the global economy. The crunch began after banks suffered large losses on sub-prime mortgage lending. This type of loan was designed for those with poor or no credit history and with record numbers of borrowers defaulting on repayments, banks consequently became less willing to lend to each other. While this initially caused a lending crisis both between banks and between banks and borrowers, there are now fears that the crisis is spreading to other areas of the economy as businesses which rely on funding to run their companies cannot get the money they need either.

The events of this latest crisis have drawn comparison with those of Northern Rock. The UK bank, which offered relatively cheap credit in the form of mortgages and personal loans was hit by sub-prime crises and has recently been nationalised. Bear Stearns was one of the first US banks to admit it had suffered a loss due to the crisis last year when, in July, two if its hedge funds had to be bailed out. BBC business editor, Robert Peston, said the move by both JP Morgan and the Federal Reserve of New York was a bailout and described the bank’s situation as "America's Northern Rock".

According to one investor, Bear Stearns will most likely have to take the deal. Founder of investment firm T2 Partners LLC, Whitney Tilson, said: "There's absolutely zero chance of another bidder because Bear is a huge black box. When a highly leverage financial institution loses the confidence and backing of the market, all its liabilities accelerate and a lot of the assets become very illiquid. No one wants to trade with you. In a matter of days that's what happened to Bear."