Market wonders which investment bank is next

NEW YORK -- JPMorgan Chase & Co.'s cut-rate buyout of Bear Stearns Co. drove some jittery investors to dump shares of major investment banks and left others worrying who's next.

The federal government offered reassurances to a veering Wall Street on Monday that no other financial institutions were set to collapse. Especially scary was the swiftness with which Bear Stearns was forced to sell out, for just 10 percent of its market value last week.

While people with bank accounts elsewhere may have little to fear, Bear Stearns' big investors will be getting a fraction of what their shares were worth. That includes 14,000 employees, who own nearly a third of the company and will likely be facing mass layoffs. The rescue effort, which came after the risks Bear Stearns took brought it to the brink of bankruptcy, may also have changed investment banking itself forever.

Investors can no longer bank on the certainty that the pillars of Wall Street will churn out profits even amid an economic downturn, which was once the case.

"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 purchase 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 see during this credit crisis.

Hints of trouble

Wall Street's other big investment houses -- Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley -- will face some tough questions when they begin reporting first-quarter results today. Lehman chief executive officer Richard Fuld denied the firm was facing similar liquidity problems, but the stock lost 20 percent of its value Monday.

Carlyle Capital Corp., which faltered because of investments linked to mortgage-backed securities, said it will wind down its operations and there would be no payout to shareholders. Futures and options broker MF Global Ltd. lost more than half its market value Monday as the company sought to counter suggestions that it could be in financial trouble.

Bear Stearns tried to fend off those same questions last week, before the flood of margin calls became a deluge that sank it. In a matter of hours, customers and investors fled, wiping out a firm that survived the Great Depression.

Bear Stearns' demise could bring about a new era of stricter regulations and a more conservative approach by traders.

Stunned employees

At Bear Stearns' 47-story headquarters in midtown Manhattan, many employees said they still couldn't believe that the nation's fifth-largest investment bank was essentially out of business. Employees said there was no meeting to inform them about what was happening.

"It's my first job out of school. I thought it was a big company -- it would be good experience," said Ki Byung, who works for a division of Bear Stearns. "Now after a couple of months, something like this happens."

Instead of making money, Bear Stearns employees trudged boxes of their personal belongings out of the investment bank while JPMorgan managers filed into it for the first time from that bank's headquarters directly across the street. No layoffs have been announced yet, but analysts expect that they could be significant.

Bear was forced into a JPMorgan-led, government-backed bailout Friday after investors lost their confidence in the firm. JPMorgan then announced Sunday night that it would acquire the firm in a deal now worth $2.21 a share, or $260.5 million, which was fast-tracked by the federal government to avoid a bankruptcy.

The agreement met swift resistance from some of the company's biggest shareholders, some of whom feel they would get more than $2 per share if Bear Stearns was forced into bankruptcy.

Joe Lewis, the British-born billionaire who is Bear Stearns' second-largest shareholder, owns nearly a 10 percent stake in the company. He told CNBC that he was against the deal and has lost more than $1 billion because of the acquisition.

Meanwhile, Bear's own employees -- once appreciative of the company because it provided hefty stock-based compensation packages -- could also hamper the deal. But they might not have much choice, said Kenneth Froewiss, a professor of finance at NYU Stearn School of Business and a former managing director and co-head of the financial institutions group at JPMorgan.

"It should be easier to get them in a room to have a heart-to-heart and explain why this is the best deal," he said.

It's possible the agreement, at least as it stands now, will not go through, said Mark Arian, the Global Change Management Leader for Towers Perrin. Already, Bear Stearns shareholder lawsuits are cropping up, he said.

"Could they have gotten a better price? Should they have gotten a better price? You could make the supposition that they had $80 book value," Arian said. "Everybody can second-guess this thing, and the individual shareholders are already out there crying foul."

The Federal Reserve Board acted swiftly to allay fears that Bear Stearns' problems would set off a chain of other investment banks faltering. The Fed cut its emergency lending rate to financial institutions to 3.25 percent from 3.5 percent. It also guaranteed JPMorgan's deal for Bear Stearns, backing up to $30 billion of Bear's most troubled assets: mortgage securities that have plummeted in value and have become tough to sell.

Fed Chairman Ben Bernanke "is trying to provide liquidity," Froewiss said. The central bank is "correctly" focusing on getting out as much liquidity as possible, Froewiss added.

Fuld said the Fed moves, "from my perspective, takes the liquidity issue for the entire industry off the table."

Investors saw it differently. Bear Stearns shares fell $25.19, or 84 percent, to $4.81 -- more than twice the $2 per share JPMorgan Chase is paying -- while JPMorgan rose more than 10 percent, or $3.77, to $40.31. UBS AG, hit hard by the same type of write-downs for mortgages that felled Bear Stearns, dropped 14 percent in Zurich.

"The banking sector is short of capital," said Anil Kashyap, a professor at the University of Chicago's Graduate School of Business. "The Fed at best buys you time."