JP Morgan Bails Out Bear Stearns – What Does It Mean?

Over the weekend, it was announced that Bear Stearns was essentially bankrupt and an emergency plan had been hatched by the Federal Reserve Bank and JP Morgan to bail the company out.

This news is a shocker. Bear Stearns is the fifth biggest bank on Wall Street. If it is in trouble, then every single financial institution has to be questioned as well. The truth of this assertion is evident as Monday morning has seen a chaotic sell off in the stock market.

A look into the Bear Stearns deal reveals the true troubles on Wall Street. First and foremost, the company was in a lot worse shape then anyone expected. Although it was trading at $30 a share last week, the bailout by JP Morgan is at $2 a share. Even then, the Federal Reserve Bank had to agree to take all the risk of the securities carried by Bear before JP Morgan would bite. In short, Bear Stearns is a total loss by all reasonable assessment.

There is another troubling sign regarding this situation. The deal is not being propelled by JP Morgan. It is the Fed that is providing the impetus. Because of certain lending laws, the Fed cannot directly assist Bear Stearns. Instead, it is using JP Morgan as a go between. The indirect effect, however, is the same. The Federal Reserve Bank is trying to save a large investment bank. The last time that happened was during the Great Depression. Think about that for a minute.

The unique thing about the world now is the interconnected nature of the economies. We’ve moved well beyond a simple export-import relationship. Now, banks are tied to together as well as most money moving systems. Bear Stearns was a major player in this field and its effective death is going to make a lot of people panic in the banking sector.

Ironically, this may be a good development for the real estate market. Why? Well, the Federal Reserve Bank has to come up with a strategy to bolster confidence and get money moving again. There is only one way. Lower the rates that banks are charged to borrow money. Indeed, the Fed has cut the rate by 2 and ¼ percent in the last two months. More cuts are expected on Tuesday, March 18th.

So, what does all this mean if you want to buy or sell real estate? Surprisingly, it doesn’t mean much with the exception of one area – liquidity. There just isn’t a lot of money available for mortgages, so getting one can be a task. At some point, however, big money is going to move back into the market. Why? Well, the rates are so low that it is just to attractive to get involved. The Fed is getting close to offering free money at this point and somebody is going to take it up on the offer.

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