Investors run for cover as Dow plunges 416 points, worst day since Sept. 2001

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World economy inna financial black hole...

Central banks tackle credit crisis
Tuesday, 11 March 2008, Central banks around the world plan another set of co-ordinated action to ease financial market woes.

The US Federal Reserve, the European Central Bank and central banks in the UK, Canada and Switzerland will inject billions of dollars into money markets. The news cheered investors and US stocks surged more than 3% - their biggest one-day gain in five years. The injection of more than $200bn is aimed at easing the credit crunch and its impact on the wider economy.

On Wall Street, the benchmark Dow Jones industrial average soared 416.66 points, or 3.55%, to close at 12,156.81. In London, the FTSE 100 index of leading shares ended 1% higher. "It's not that banks don't have cash to lend; it's that they don't trust each other to have sufficient assets" - Evan Davis, BBC Economics Editor

"The key to any sustainable rally is going to be an improvement on the credit side," said Michael Darda, chief economist at MKM Partners. "But this is positive. The Fed's making a major effort to get liquidity and credit into the cracks and crevices of the financial system that need it the most." The dollar rose sharply against the yen and rebounded from a record low against the euro.

Crunch continues

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Carlyle losin' its mortgage business...

Banks to Seize Carlyle Capital Assets
13 Mar.`08 — The likely liquidation of Carlyle Capital Corp.'s remaining assets sent the fund's shares plummeting more than 90 percent Thursday and rattled stock markets around the globe. It was also a high-profile setback for private equity fund Carlyle Group.

Carlyle Capital said late Wednesday that it expected creditors to seize all of the fund's remaining assets — investment-grade mortgage-backed securities — after unsuccessful negotiations to prevent its liquidation. Its shares, which went public at $19 a share in July and traded at $12 just last week, tumbled 93.6 percent to 18 cents on the Euronext exchange. "Although it has been working diligently with its lenders, the company has not been able to reach a mutually beneficial agreement to stabilize its financing," Carlyle Capital said in a statement. Carlyle Capital said it has defaulted on about $16.6 billion of its debt as of Wednesday, and the rest is expected to go into default soon. About $5.7 billion of the defaulted debt has been sold, the Carlyle Group said Thursday. Spokeswoman Emma Thorpe said she couldn't say what has been done with the rest.

The Amsterdam-listed fund shook financial markets last week after missing margin calls from banks on its $21.7 billion portfolio of residential-mortgage-backed bonds. Carlyle's troubles have amplified fears that billions of dollars of depressed mortgage-backed securities will flood the market, reducing their value even further. The Dow Jones industrial sank more than 200 points, following indexes in Asia and Europe lower. The sell-off would mark a huge defeat for the Washington, D.C.-based Carlyle Group, one of the largest private equity firms in the world. Carlyle Capital, registered in Britain but managed by New York-based executives, was the first of its 55 funds to go public. Carlyle Group said Thursday that the defaults would not affect its other investments.

"We believe it will not have a measurable impact on any of our other funds, investments and portfolio companies," the Carlyle Group said in a statement. It manages $81.1 billion and has invested $43 billion of equity in 774 corporate and real estate transactions that cost a total of $229.3 billion. Since the beginning of the credit crunch, Carlyle Group has extended loans to Carlyle Capital to help meet margin calls, including a $150 million revolving loan, Citigroup analyst Donald Fandetti told investors in a research note March 6. "It appears CCC is fully drawn on this line and so far no further loans have been provided."

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Paulson: More mortgage lender rules needed
Thurs., March. 13, 2008 WASHINGTON - Treasury Secretary says rule change needed to avoid new credit crisis

Economic policymakers on Thursday recommended stricter regulation of mortgage lenders as part of a broad effort to prevent a repeat of a credit crisis threatening to drive the country into recession. With problems in the credit and housing markets worsening, the Bush administration now seems to favor a larger role for government — an approach Republicans generally have had little appetite for. Recommendations from a presidential advisory group on financial markets cover mortgage lenders and other institutions, as well as investors, credit ratings agencies and regulators.

Treasury Secretary Henry Paulson, who leads that group, said the effort is not about “finding excuses and scapegoats.” The suggested actions, he said, are intended to avoid another meltdown in the credit and housing markets. “The objective here is to get the balance right — regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it,” Paulson said.

Federal and state regulators should strengthen oversight of mortgage lenders, according to the group’s report released Thursday. Also, states should follow strong, uniform licensing standards for mortgage brokers. No such nationwide system exists, although legislation in Congress would create one. Sen. Charles Schumer, D-N.Y., said administration officials are “beginning to put their toe in the water when it comes to government involvement to help the economy. The bad news is they’re going to have to do a lot more than that to address the problem.”

Other recommendations urge improvements by credit rating agencies, criticized for not accurately assessing risk on complex mortgage investments. These kinds of business transactions soured, causing market chaos. The report also suggests clearer disclosures and assessments of risks on investments. Greg McBride, senior financial analyst at Bankrate.com, likened the recommendations to “putting up a traffic light only after a series of auto accidents.” “It is purely reactionary,” he said. “The ideas themselves are not necessarily new but the pressure to do something is growing as housing problems become more pronounced.”

More Paulson: More mortgage lender rules needed - Mortgage Mess - MSNBC.com

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Bear Stearns bailout...

Bear Stearns' No. 1 foe: Fear itself
March 14, 2008: The brokerage firm says its fundamentals are intact, but can it survive a market panic?

Bear Stearns isn't out of the woods yet. The struggling brokerage firm spent Friday trying to assure fearful investors that it isn't on the brink of insolvency. CEO Alan Schwartz and finance chief Sam Molinaro used a midday conference call to emphasize that Bear Stearns' financial situation isn't as dire as rumors suggest. They said the firm sees Friday's 28-day financing agreement with JPMorgan Chase (JPM, Fortune 500) as buying time to "get more facts out into the marketplace."

But Wall Street wasn't buying it. Bear Stearns (BSC, Fortune 500) shares, after plummeting as much as 50% to an 11-year low on the announcement of the Fed-backed JPMorgan financing deal, held steady at much-reduced levels throughout Friday's conference call. The shares were down 38% at 1 p.m. EDT after the call wrapped up. Schwartz and Molinaro insisted on Friday's call that there have been "no material changes" in Bear Stearns' financial strength in recent days, and that the firm expects its first-quarter results to be within the range of analysts' estimates when Bear Stearns posts its numbers Monday afternoon.

But Molinaro also admitted that Bear Stearns was in dire straits Thursday night, after some firms that trade with it - fearful about rumors of a liquidity squeeze at Bear Stearns - "no longer wanted to provide financing." That comment shows that Bear Stearns is dealing with a classic run-on-the-bank. The firm's short-term creditors refused to lend the firm any more money via the extension of overnight loans, and simultaneously demanded repayment of outstanding debt. The one-two punch overwhelmed Bear's cash position, forcing it to seek help. Had the Fed not stepped in, it appears doubtful Bear could have operated today. The stunning developments cut Bear Stearns' stock value as low as $26.85. The shares opened the week at $69.75 and traded as high as $159 last year.

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Bear Stearns bailed out by Fed, JPMorgan
14 Mar. `08 - Bear Stearns Cos., one of the most venerable names on Wall Street, turned to a rival bank and the federal government for a last-minute bailout Friday to prevent it from collapsing.

The Federal Reserve responded swiftly to pleas from Bear Stearns that its coffers had "significantly deteriorated" within a 24-hour period as rumors about the bank's situation fueled the Wall Street version of a run on the bank. Central bankers tapped a rarely used Depression-era provision to provide loans, and said they were ready to provide extra resources to combat an erosion of confidence in America's biggest financial institutions. Nearly half the value of Bear Stearns, or about $5.7 billion, was wiped out in a matter of minutes as investors felt the bailout signaled that the credit crisis has reached a more serious stage, and now threatens to undermine the broader financial system — and the U.S. economy.

"My guess is by next week, there will be rumors of other large, familiar institutions" that might be in financial trouble similar to Bear Stearns, said Anil Kashyap, a professor at the Graduate School of Business at the University of Chicago. No one has disclosed how large the financing offered to Bear Stearns is. Bear Stearns, the nation's fifth-largest investment bank, made its fortune dealing in opaque mortgage-backed securities — a strategy that backfired amid the worst housing slump in a quarter century. The bank has racked up $2.75 billion in write-downs since last year, and releases first-quarter results on Monday that could show more losses.

Alan Schwartz, Bear Stearns' chief executive, said the bank had enough money to keep operating at the start of the week. However, market speculation swelled Thursday — leading investors, customers and lenders to withdraw their business or rescind credit lines. By that night, Schwartz said the bank recognized that the pace of withdrawals could outstrip the company's resources. He then contacted JPMorgan Chase & Co. — the third-largest U.S. commercial bank — for help.

JPMorgan, which has been hurt far less by the mortgage morass than other investment banks, is providing secured funding to Bear Stearns for 28 days, and those loans will in essence be insured by the Federal Reserve. Schwartz said this will buy Bear Stearns time — allowing it to "convince customers and counterparties that we have the ability to fund ourselves every day, to do business as usual."

Schwartz confirmed, as many on Wall Street suspected, that Bear Stearns could now be up for sale. He told analysts during a conference call that the short-term funding "is a bridge to a more permanent solution." Bear Stearns is working with investment bank Lazard Ltd. to explore its options. Top executives from Bear Stearns and JPMorgan were discussing the outright sale of Bear Stearns to JPMorgan, according to a person familiar with the talks who was not authorized to speak on the record. The next 28 days could provide JPMorgan with the time needed to complete due diligence on Bear Stearns before buying the company, giving detail about how much risk is on the books.

More Bear Stearns bailed out by Fed, JPMorgan - Yahoo! News

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Stearns bought out...

JPMorgan Agrees To Buy Bear Stearns
March 16, 2008 - Fed Approves Lending Rate Cut And Creates New Lending Facility For Big Investment Banks

JPMorgan Chase said Sunday 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 & Co. said the $2 a share, all-stock deal has received the required approvals from the federal government and the Federal Reserve. Bear Stearns shares close Friday at $30 a share. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets. The two sides reportedly wanted to lock up a deal before investors could put pressure on both of their stocks once Asian markets were open for business.

At almost the same time as the deal for control of Bear Stearns was announced, the Federal Reserve said it approved a cut in its lending rate to banks to 3.25 percent from 3.50 percent and created another lending facility for big investment banks. The central bank's official meeting is on Tuesday. Before the emergency move to lower the discount rate, which is the rate at which banks lend each other money, the Fed was widely expected to again cut its headline rate by as much as a full point to 2 percent.

Federal Reserve Chairman Ben Bernanke says the central bank's latest actions "will provide financial institutions with greater assurance of access to funds." The announcement from both the Fed and JPMorgan comes ahead of what some analysts expected to be a brutal day for global stocks. Already, before the announcements, New Zealand's markets opened drastically lower - then began to recover after the deal was unveiled.

More JPMorgan Agrees To Buy Bear Stearns , Despite Deal, Asian Markets Falter In Response To U.S. Financial Insecurities - CBS News

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Fed drops lending rate a quarter point
16 Mar.`08 WASHINGTON - Move leaves it at 3.25 percent; new lending outlet for banks created

The Federal Reserve, in an extraordinarly rare weekend move, took bold action Sunday evening to provide cash to financially squeezed Wall Street investment houses, a fresh effort to prevent a spreading credit crisis from sinking the U.S. economy. The central bank approved a cut in 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 new lending facility will be available to big Wall Street firms on Monday.

“These steps will provide financial institutions with greater assurance of access to funds,” Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening. The Fed acted just after JP Morgan Chase & Co. agreed to buy rival Bear Stearns Cos for $236.2 million in a deal that represents a stunning collapse for one of the world’s largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JP Morgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.

The new lending facility — described as a cousin to the Fed’s emergency lending “discount window” for banks — is geared to give investment houses a source of short-term cash on a regular basis — if they need it. It will be in place for at least six months and “may be extended as conditions warrant,” the Fed said. The interest rate will be 3.25 percent and a range of collateral — including investment-grade mortgage backed securities — will be accepted to back the overnight loans. Treasury Secretary Henry Paulson said he was pleased by Sunday’s developments.

More Fed drops lending rate a quarter point - Stocks & economy - MSNBC.com

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Stocks waver in aftermath of Bear deal...

Stocks down after Bear Stearns deal
17 Mar.`08 - Wall Street fluctuated in temperamental trading Monday as investors grappled with news of JPMorgan Chase & Co. buying the stricken Bear Stearns & Co. in a deal backed by the government. The Dow Jones industrials was at times down nearly 200 points, and at others crept into positive territory.

A buyout of Bear Stearns was certainly more appealing than the alternative: letting the investment bank collapse and causing huge losses for anyone linked to it. And some unprecedented moves by the Federal Reserve gave investors a bit of solace on what many predicted would be a day of precipitous losses in the stock market. Besides supporting the buyout, the Fed lowered the rate it charges to loan directly to banks by a quarter-point on Sunday night — two days before its scheduled meeting Tuesday. The central bank also set up a lending option for firms, including many non-bank financial services firms, to secure short-term loans for a broad range of collateral.

"This removes the risk of further slides for these companies, the risk that a Bear Stearns incident would happen again," said Robert Pavlik, portfolio manager at Oaktree Asset Management. The Fed appears to be pledging to do everything in its power to keep the credit crisis from destroying the financial industry and the economy. Policy makers at the central bank are expected to reduce the target fed funds rate — the rate banks charge each other for overnight loans — by at least a half-point on Tuesday, and perhaps even a full point.

Still, the market remained extremely volatile. The sale of Bear Stearns — and the fact that JPMorgan valued the fifth-largest Wall Street investment bank at a minuscule $2 a share, or $236 million — stirred fear among investors worldwide about other banks' exposure to the troubled credit markets. "You're going to have some very weak players pushed out of business," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. He said JPMorgan's buy of Bear Stearns and Bank of America Corp.'s acquisition of mortgage lender Countrywide Financial Corp. are probably not the only rescues the industry will witness during this credit crisis.

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Bear fire sale sparks rout, Bush tries to calm
17 Mar.`08 - A fire sale of Bear Stearns Cos Inc (BSC.N) stunned Wall Street and pummeled global financial stocks on Monday on fears that few banks are safe from deepening market turmoil.

Trying to assuage worries that the credit crisis is spinning out of control, President George W. Bush said the United States was "on top of the situation," but the sell-off intensified in the early afternoon. The U.S. Federal Reserve geared up for a deep cut in interest rates on Tuesday to blow money into the fragile financial system -- the latest in a series of rate cuts that has brought down borrowing costs by 2-1/4 percentage points and hammered the U.S. dollar to record lows.

Staff at Bear Stearns' Manhattan headquarters were welcomed to work on Monday by a two-dollar bill stuck to the revolving doors -- a spoof on the bargain-basement price of $2 per share that JPMorgan Chase (JPM.N) is paying for the firm. A hopeful Coldwell Banker real estate agent was hawking cheap apartments to employees who saw the value of their stock options go up in smoke. The combination of Bear Stearns' bailout and the Fed's offer on Sunday to extend direct lending to securities firms for the first time since the Great Depression highlighted just how hard the credit crisis has hit Wall Street.

And it scared market players worldwide. "If you get a crisis of confidence in the wholesale banking space and something the size of Bear Stearns could go under, then people start to panic. You get a real fear factor," said Simon Maughan, analyst at MF Global in London.

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How Bear Stearns demise came about...

How subprime killed Bear Stearns
March 17, 2008: A problem with risky mortgages has led to a global financial crisis. The bigger issue: Experts don't know when it will end.

It started last summer when borrowers with weak credit started defaulting on their mortgages. Last night, it brought down an 85-year-old pillar of Wall Street. How did we get to this point? How did rising foreclosures among subprime borrowers lead to Bear Stearns being scooped up in a fire-sale for two bucks a share?

The answer starts with investment banks: They sold complex securities backed by debt that was a lot riskier than most realized. The realization that the banks had failed to manage this risk sparked widespread concern among investors and other financial firms. Suddenly, investors found they couldn't put a value on much of what the banks were selling. As a result, the lending markets that keep Wall Street humming seized up because people feared they wouldn't get paid back.

"We got to the point where the various parties in the financial system started not to trust each other," said Lawrence White, an economics professor at New York University. What's worse is that no one knows when it will end.

Every week, it seems, another part of the U.S. financial system falters and the federal government has to come up with a new rescue plan. The Federal Reserve Bank's actions have helped soothe the markets in past crises, but the magnitude of the current meltdown may prove unprecedented, experts said. Today's troubles ensnare not only traditional banks, but investment firms, hedge funds, insurance companies and non-bank lenders.

No place like home

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Stocks back down day after rate cut...

Stocks: right back down
March 19, 2008: Wall Street gives up nearly 75% of the previous session's rally as investors retreat. Oil and gold prices plunge. Morgan Stanley earnings, Fannie and Freddie news help, but can't stop losses.

Wall Street retreated Wednesday, with investors giving back a big chunk of the gains made in the previous session, with losses in financials and commodity stocks leading the way. Slumping oil and gold prices did little to relieve inflationary worries and instead sparked a big selloff in oil services and metal and mining stocks. The Dow Jones industrial average (INDU) lost nearly 300 points or 2.4%. The broader Standard & Poor's 500 (SPX) index lost 2.4%. The Nasdaq composite (COMP) lost 2.6%. All three stock indexes had been on both sides of unchanged throughout the morning.

Stocks rallied Tuesday, with the Dow climbing 420 points, its biggest one-day point gain in 5-1/2 years after the Federal Reserve announced a steep cut to short-term interest rates. But stocks slumped Wednesday after investors tried to push stocks higher in the morning on better-than-expected earnings from Morgan Stanley and news that regulators will let Fannie Mae and Freddie Mac buy more home loans. "This is standard profit taking after a rally," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. He said that although the Fed news from the previous session and the financial news from Wednesday's session were positive, credit crisis fears remain.

Thursday is a big day, Rovelli said, because of the impact of the options expiration, a quarterly event in which stock index futures and options, and individual stock futures and options, are all expiring at the same time. This can lead to increased volatility in the underlying stocks and could also speak to the increased volatility Wall Street has seen this week. The expiration day usually occurs on a Friday but is happening Thursday because all financial markets are closed the following day for Good Friday. The options expiration could brings in some "serious short covering," said Peter Cardillo, chief market economist at Avalon Partners. Short-covering refers to a process by which traders who have sold stock short to take advantage of a falling market have to buy it back.

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Best hope for Bear investors: more money from JPM
Wed Mar 19, `08 - Bear Stearns Cos (BSC.N) shareholders like tycoon Joseph Lewis are hoping that another suitor will emerge to challenge JPMorgan Chase & Co (JPM.N), but their best hope may be prying a few extra dollars from JPMorgan itself, analysts said.

Lewis, who owns about 8.35 percent of Bear's shares, said in a regulatory filing on Wednesday that he is prepared to "take whatever action ... necessary and appropriate to protect the value of (his) investment." That may include talking to Bear Stearns or other parties about possible options for the investment bank, the filing said. Press reports disagree about whether Lewis is seeking another buyer for Bear, but analysts say finding one that could pass muster with the U.S. government is a tall order.

"People are fantasizing," Keith Wirtz, president and chief investment officer at Fifth Third Asset Management, which manages $22.5 billion, said of investors who have bid Bear Stearns substantially above JPMorgan's $2.32-a-share offer. But by getting enough shareholders to commit to vote against the deal, they may be able to get JPMorgan to budge. "There is a time element to this. All the other firms are in there, trying to swoop up Bear employees and customers.... If I were JPMorgan, I'd pay an extra dollar a share just to get the deal done in a reasonable period of time," said Gordon Marchand, portfolio manager at Sustainable Growth Advisers in Stamford, Connecticut.

Bear Stearns shares closed Wednesday at $5.26, more than double the value of JPMorgan's offer. Still, that was down 11 percent from their surge the day before, in what could be a sign of waning optimism about a higher price. JPMorgan agreed to buy Bear on Sunday in a deal now worth nearly $340 million. The transaction was encouraged by the U.S. Federal Reserve, which feared that if Bear went out of business, the entire U.S. financial system could be shaken. JPMorgan for its part is not worried about a rival bidder and does not plan to adjust the terms of the deal, a person familiar with the bank's thinking said. The No. 3 U.S. bank declined to comment.

But there may be many parties voting against the acquisition, including credit derivatives traders hoping to push Bear into bankruptcy to collect on their credit default contracts. Investors that bought Bear Stearns shares when they were over $100 or over $150 might want much more than a few dollars a share, and may also vote against the acquisition in its current form. It's not clear if a few extra dollars would appease them. But it might win over investors that bought on Monday at, say, $3 a share.

WHITE KNIGHT -- A FAIRY TALE?

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Report: SEC Probes Bear Stearns...

Report: SEC Probing Contracts Betting at Bear Stearns
Mar 20, 2008 - The SEC Is Investigating Activity Just Before JP Morgan's Purchase

The Securities and Exchange Commission is investigating the events leading up to the collapse of Bear Stearns , specifically a surge in options contracts betting that the investment bank's share price would fall sharply, according to the Wall Street Journal.

Citing people familiar with the matter, the paper reported the SEC probe focuses on a surge last week in "put" options that came days before the firm's proposed sale to J.P. Morgan Chase & Co. for stock now valued at about $278.5 million, or $2.32 a share.

A put option allows the buyer of the option the right to sell a certain number of shares in the company at a specific price within a set time.

ABC News: Report: SEC Probes Bear Stearns

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When's it all gonna end?...

Is the worst over, or just beginning?
March 21, 2008: Falling long-term Treasury yields could eventually help consumers - but also may be a sign of continued concern about the economy.

Bond yields have plunged in the past few weeks. And even if you are not an active investor, you should care about what's been going on in the bond markets lately. Here's why. The yield on the benchmark U.S. 10-year Treasury currently stands at about 3.33%, down from nearly 4% about a month ago. The rate on this long-term government note is a key factor behind what happens to fixed-rate mortgages.

If rates continue to fall, they could hit not only a new low for the year - the 10-year briefly touched 3.28% in January - but could come close to falling below the 3.07% level they hit in June 2003, which was a 45-year low at the time. Other Treasury rates have also fallen sharply. The yield on the U.S. 2-year Treasury is now only 1.58%. The rates on these issues influence the rates for other types of consumer loans, as well as small business loans.

The fact that rates are this low is a sign of just how weak the economy is, since lower rates usually correspond with tougher economic stretches while rising rates are often a product of a robust economy. Still, on the surface, falling longer-term yields should be a relief for consumers. The problem is that loan rates have not fallen as far as they should considering how much yields have declined because of the problems in the credit markets from the subprime mortgage meltdown.

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Treasury bonds for $100
March 21, 2008: Government lowers the minimum price to buy Treasury bonds to $100 from $1,000 in a move to make securities more available to average investors.

The Treasury Department said Friday it plans to lower the minimum investment amount for government bonds in an effort to make them more affordable for average investors. Beginning April 7, people will be able to buy as little as $100 in Treasury marketable bills, notes, bonds and Treasury Inflation-Protected Securities (TIPS). Investors will also be able to purchase these securities in increments of $100.

The minimum amount and increment purchase size for Treasurys has been $1,000 since August 1998. "The new, lower minimum Treasury amount will put marketable securities within reach of more savers and investors in the United States and around the world," said Anthony Ryan, Assistant Secretary of the Treasury for Financial Markets.

Treasury securities can be purchased directly from the Treasury by creating a TreasuryDirect account online at treasurydirect.gov or a Legacy Treasury Direct account. Securities can also be obtained on either a competitive or non-competitive basis through bond brokers and dealers.

Source

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More money for shareholders...

JPMorgan in talks to raise Bear Stearns bid
24 Mar.`08 - JPMorgan Chase & Co on Monday raised its takeover offer for Bear Stearns Cos to about five times its original bid and struck a deal to buy nearly 40 percent of the bank, all but locking up the controversial acquisition.

Under the revised deal, JPMorgan will buy 95 million newly issued Bear Stearns shares, and Bear's board agreed to vote in favor of the offer. With those shares, JPMorgan would own 39.5 percent of Bear Stearns and have secured the backing of Bear Chairman James Cayne, owner of a 3 percent stake in Bear. "It looks like JPMorgan has this deal sewn up right now," said John Augustine, chief investment strategist with Fifth Third Investment Advisors.

The new offer valued Bear Stearns at about $2.1 billion, compared with $236 million under the original deal. Additionally, JPMorgan would also be on the hook for the first $1 billion in losses stemming from Bear Stearns' less liquid assets, and would set aside $6 billion to cover severance, litigation and other transaction-related costs. The new deal, which has financial backing from the Federal Reserve, is likely to raise concerns that the U.S. government is prepared to help rescue a failing Wall Street bank while declining to bail out millions of home owners facing the possibility of foreclosure.

The Federal Reserve Bank of New York is providing $29 billion in special financing for the deal and will take control of a $30 billion portfolio of Bear's less liquid assets. "This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning," the New York Fed said in a statement.

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