http://www.smartmoney.com/…

J. P. Morgan Chase & Co. said Sunday evening that it is buying battered broker Bear Stearns Cos. for $236 million in a Federal Reserve-backed bailout unprecedented in scope and execution.

The Federal Reserve, which cut the discount rate in a coordinated move with its announced backing of the deal, is taking the extraordinary step of providing special financing in connection with this transaction.

The Fed has agreed to provide financing of up to $30 billion of Bear Stearns’ (BSC) less liquid assets. Roughly $20 billion of that funding will back mortgage securities held by the beleaguered brokerage firm.

J.P. Morgan (JPM) will exchange 0.05473 shares of its common stock for one share of Bear Stearns stock. Both boards have approved the transaction.

The deal offers Bear investors $2 a share, a massive discount to the firm’s closing price of $30 on Friday. A week ago the stock was trading above $60 and a year ago it was at more than $150. On Friday, Bear executives told analysts and investors that the firm’s book value - a measure of assets minus liabilities — was still at least $80 a share.

The destruction of billions of dollars worth of value in a matter of days shows how vulnerable even the biggest brokerage firms are to the current credit crunch. Bear’s business quickly crumbled last week as counterparties and clients lost confidence and stopped trading with the firm. Since being founded in 1923, Bear managed to survive all other crises, including the Great Depression.

And this shows how serious this whole situation is. This story is partially from Friday and the buyout and discount rate drop (first in almost 3 decades) this weekend. Ron Paul and the rest of the Austrians tried to make monetary policy and the economy a core aspect of this current US presidential race and was mocked by McCain, Romney, Rudy, Thompson and the others. Now the shit is hitting the fan, the Federal Reserve is likely to drop another 100 basis points. Some are saying that they may drop to 1.75%. What will the Fed do if we get toward 0% and we still have issues?

As Michael S. Rozeff said over at LRC:

There is no reason why the firm should not have been let fail. Its customers and lenders were abandoning it in a vote of no confidence. Why shouldn’t failures fail? The firm’s stock fell sharply and it will probably fail or be absorbed anyway. If Bear could not pay its borrowings to others, should they not suffer and feel the pangs of their errors? If Bear had to liquidate securities, should they not find a price at which investors are willing to hold them? Let the bankruptcies roll! Why is Bear favored and not others? How can a financial system in which risk plays a key role be insulated against downside risks when they come to pass? Only by shifting them to taxpayers. Main Street’s distrust of Wall Street is due for a resurgence now that the open and corrupt alliance between the Fed and its Wall Street favorites is coming out into the open. The spectacle of one bailout after another is disgusting and dismaying. The Fed is doing everything it can to prolong the financial difficulties and heighten their impact.

I wonder if we will see Bush call a bank holiday? I’d have to be a week just to keep from people freaking out over the call of the holiday.

UPDATE:

Snapshot of the bank’s stock prices at 12:00PM:

Is Lehman Brothers next to go?

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