AP
Bear Stearns Details Financial Condition
Friday April 11, 6:52 pm ET
Bear Stearns Says Assets Under Management, Trading Have Plummeted in Wake of Distressed Sale


NEW YORK (AP) -- Bear Stearns & Co.'s assets under management have shrunk 20 percent since the end of November, and stock and fixed income trading has plummeted to "well less" than half of activity levels in 2007 and the first quarter of this year, the company said in documents filed with the Securities and Exchange Commission late Friday.

The investment bank, which is being taken over by JPMorgan Chase & Co., with backing from the Federal Reserve, nearly collapsed last month after bad bets in the mortgage market dried up its access to capital and severely deteriorated its ability to generate earnings. With rumors leaking through the market that the bank was in danger of running out of money, investors did not want to trade with Bear Stearns or lend the company money.

The SEC filing details rapidly deteriorating conditions that have impaired the New York investment bank's ability to conduct business as it once had. Assets under management fell to $36 billion from $46 billion between the end of its fiscal year on Nov. 30 and March 24. A substantial number of its prime brokerage clients moved accounts to other firms and customer margin balances fell 23 percent to $66 billion since the end of its 2007 fiscal year, according to the filing.

"The extremely challenging market environment and the unique issues associated with the operating environment of the company have adversely affected the company's day-to-day business operations," the company said in the filing.

Bear Stearns said it faces a rapid loss of trading partners and customers and may be forced to file for bankruptcy protection and liquidate its assets if the company's deal to sell itself to JPMorgan does not close. With the bank's stock trading at about $30, JPMorgan stepped in with a $2 per share offer that was later raised to $10.

In the days leading up to the offer from JPMorgan, Bear Stearns released statements suggesting the company's finances were sound. Still, nervous investors sold shares sending the stock down more than 60 percent the first 10 days in March. The shares traded as high as $159.36 apiece in the last 12 months.

In a separate SEC filing Friday, JPMorgan said a private equity firm expressed interest in exploring a transaction with Bear Stearns on Saturday March 15, and proposed a deal that included a $3 billion cash infusion in return for 90 percent equity interest in the firm. The proposal required a $20 billion credit facility from an not-yet-formed consortium of banks and assurance that the New York Fed would make loans available to Bear Stearns through its discount window for one year.

Later that day, JPMorgan met with representatives from Bear Stearns and its investment bankers to discuss a deal that would value Bear Stearns at $8 to $12 per share. It also considered buying 19.9 percent of the then outstanding shares, options to purchase its prime brokerage business and Bear Stearns' headquarters building.

But by Sunday, JPMorgan expressed doubt that it would do the transaction because of the risk involved and informed Bear Stearns, the U.S. Treasury and the New York Fed, that to proceed, it would need some level of financial support from the New York Fed. Meanwhile, Bear Stearns was considering potential bankruptcy and liquidation options, and the private equity firm was trying to put together details to make its proposal viable, the filing said.

Meanwhile, Bear Stearns' management did not believe it could open for business on Monday without a transaction that restored market confidence in the firm. Adding pressure to the situation, the firm was advised that it would not be able to start trading in Asia the next morning and would have to disclose that fact Sunday evening, New York time.

The private equity buyer was unable to secure funding for the credit facility portion of its proposal in time and was not able to get support from the New York Fed, leaving JPMorgan as the only bidder.

JPMorgan said, based on the New York Fed's willingness to provide $30 billion in special funding, it thought it could work toward a deal that valued Bear Stearns at $4 per share, but eventually decided that it could not offer more than $2, which was subsequently accepted.