Mar 24, 2008, 21:16 GMT
New York - Faced with massive resistance from stockholders, the US bank JPMorgan Chase Monday quadrupled its offer for the ailing investment bank Bear Stearns to 10 dollars a share.
The bank said its first step would be to buy 40 per cent of the Bear Stearns stock directly from the investment bank, to secure substantial support when stockholders vote.
The move is backed by 29 billion dollars from the federal government to cover losses JP Morgan may experience from the purchase, the latest in a string of of government efforts totalling 400 billion dollars to bail out foundering investment banks which bought up volatile subprime mortgages.
Investments in such mortgages - which circumvented government regulations that apply to traditional bank lending to homeowners - were extremely risky and have resulted in a financial crisis that has spread worldwide.
About 2 million homeowners defaulted on their loans in 2007 alone. Housing prices have plummeted as a result of the glut of overpriced properties on the market and banks have tightened up credit supplies.
For existing housing alone, prices have dropped 8.2 per cent from February 2007, the National Association of Realtors said Monday.
The JPMorgan offer for Bear Stearns had originally been described as being five times the value of the original offer, but that figure was clarified in the course of the day.
The US central bank approved - in fact urged - the sale last week. The US central bank, the Federal Reserve, is backing the deal with up to 29 billion dollars in financing to cover any losses associated with the deal.
JPMorgan originally offered 2.50 dollars a share, which represented a 90 per cent write down in the value of its stock. The board accepted the offer, but shareholders were poised to reject the firesale price.
The new offer puts a value of 1 billion dollars on the company.
The sale of Beaer Stearns came after a shortage of cash forced the company to seek short-term financing from the Federal Reserve through JPMorgan Chase after clients pulled 17 billion dollars from Bear Stearns over two days.
The collapse of two of its mortgage funds helped spark the collapse of the US sector and the economic downturn.
There was a ray of light in the crisis on Monday, when the Raltors' group also said the month-to-month sales of existing homes rose 2.9 per cent in February, the first increase in months.
But the ongoing crisis has prompted calls for stricter regulations of investment banks after years of deregulation opened up loopholes that allowed the current crisis to occur.
In a commentary column Monday in the New York Times, Paul Krugman described investment banks like Bear Stearns as the 'shadow banking system' which relies on 'complex financial arrangements to bypass ... safety regulations.'
'Now, the shadow banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s,' Krugman wrote.
He criticized the government rush to bail out the banks, writing: 'If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks.'
US President George W Bush has defended the government moves, saying 'the United States is on top of the situation.'
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