Monday PM March 17th, 2008
by: Ed Mayberry, March 18, 2008 12:03:00 pm
JPMorgan Chase says it will acquire rival Bear Stearns in a deal valued at $236.2 million, a stunning collapse for one of the world's largest and most venerable investment banks. JPMorgan Chase & Company said the $2 per share, all-stock deal has received the required approvals from the federal government and the Federal Reserve. Bear Stearns shares closed Friday at $30 a share. JPMorgan Chase says the Fed will provide it with special financing for the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.
Treasury Secretary Henry Paulson says the Bush administration can feel the economy "has slowed way down'' and will "do what it takes'' to stabilize chaotic markets. In a series of appearances on the weekend talk shows, Paulson defended the Federal Reserve's decision to help rescue Bear Stearns. The Wall Street investment bank had made a fortune in mortgage-backed securities but faced a possible collapse after those investments soured. Friday, the Fed used a depression-era procedure and stepped in with JPMorgan Chase to offer Bear emergency financing. The treasury chief sidestepped questions about what would have happened if the Fed hadn't ridden to the rescue and whether other firms are on shaky ground. But Paulson said the administration's priority is maintaining the stability of the nation's financial system.
The Federal Reserve is taking a series of new steps to help provide relief to a spreading credit crisis that threatens to plunge the economy into recession. The central bank this weekend approved a cut to its lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans. The Fed says in a statement, the steps are "designed to bolster market liquidity and promote orderly market functioning." It goes on to say that "liquid well-functioning markets are essential for the promotion of economic growth.'' According to the Fed, it will be in place for at least six months and "may be extended as conditions warrant.''
President Bush says the current economic slump may be challenging, but he says the nation's financial institutions are strong. Bush met today with Treasury Secretary Henry Paulson and other top economic advisers as markets around the world remain in turmoil. The president says he and his senior aides "agree that our financial institutions are strong." He admits, however, that "we're dealing with a difficult situation'' with uncertain stock markets, oil prices at record highs and the dollar posting record lows.
Crude futures have dropped sharply, pulling back from record levels as investors fear that the financial crisis that forced the sale of Bear Stearns is a sign of deeper economic trouble. Oil's steep decline comes hours after futures rose to a new trading high near $112 a barrel on the Federal Reserve's surprise Sunday move to lower a key interest rate by a quarter point. Crude oil futures settled to $105.68 today. In the past several months, fed rate cuts have fueled rallies in oil prices. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak. Interest rate cuts, and even the prospect of future cuts, tend to weaken the dollar further.
A lawsuit has been filed by the Huntingdon Council of Co-Owners seeking $100,000 in unpaid fees from the widow of Enron founder Ken Lay. Linda Lay's attorney denies allegations in the high-rise condominium's lawsuit, asking that she be awarded costs for fighting the claims. The federal government is currently trying to seize nearly $13 million from Lay's estate. Ken Lay was convicted in May 2006 on fraud and conspiracy charges, but his convictions were vacated because of his July 2006 death before an appeal could be launched. Linda Lay maintains because her husband did not commit any crimes, her assets are not subject to forfeiture.
Investors will be watching to see what else the Federal Reserve has in store this week, with a policy-setting meeting set for Thursday. Analysts are expecting another interest rate cut given all the pressures the economy is facing. On Tuesday, the Commerce Department reports on new home construction. Analysts are looking for declines in the starts number for February and also for housing permits, a gauge of future construction. The Producer Price Index is due that day as well. The consensus is for a rise of 0.3 percent in the measure of wholesale price inflation. Last Friday, the Labor Department said consumer prices were flat in February.
John Hofmeister, the president of Shell Oil, will retire on June 1st. He'll be replaced by Marvin E. Odum, currently Executive Vice President for the Americas for Shell Exploration and Production. Odum will retain his current role, the company said Monday. Hofmeister, 60, joined Shell in 1997 as Director of Human Resources in The Hague and was named president of the Houston-based company in 2005. Shell is the U.S. arm of Royal Dutch Shell, Europe's largest oil company.