A fire sale of Bear Stearns stunned Wall Street and pummeled global financial stocks on Monday on fears that few banks are safe from deepening market turmoil.
"Last evening the Bear Stearns situation reached a crescendo, as JPMorgan agreed to acquire the wounded broker for a token amount of $2 per share," research firm CreditSights said. "The reality check is that there are many challenged major banks, brokers, thrifts, finance/mortgage companies, and only a handful of bonafide strong U.S. banks."
As a result, financial firms face a "new world order," CreditSights concluded.
President Bush assured the world that the United States was "on top of the situation" in financial markets as the Federal Reserve geared up for a deep cut in interest rates on Tuesday to blow money into the fragile financial system.
Staff turning up for work at Bear Stearns' Manhattan headquarters were welcomed by a two-dollar bill stuck to the revolving doors -- a spoof on the bargain-basement price of $2
per share that JPMorgan Chase is offering for the Wall Street firm. A hopeful Coldwell Banker realtor was hawking cheap apartments to employees who saw the value of their stock
options go up in smoke.
The combination of the speedy sale of Bear Stearns at a rock-bottom price and the Fed's offer 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.
The grim mood spread beyond Bear, Wall Street's fifth-biggest bank, as investors bailed from rival Lehman Brothers for fear it would be next to face a cash crunch. Lehman shares plummeted 20 percent and briefly touched a 6-1/2 year low. Hedge funds told Reuters on Friday they were still doing business with Lehman and a spokesman said the firm was in good shape. (Click here to see what the experts say about Lehman's future.)
The financial world is more interconnected than ever and the merest whiff of trouble can result in a run on a bank: trading partners and funds pulling money and calling in loans. Indeed, Bear's fall shows how fast things can change on Wall Street.
Shares of European banks--including UBS in Switzerland, HBOS in Britain and SocGen in France--fell more than 10 percent as concern swept markets that the value of risky assets needs to be marked down even further.
In Asia some of Japan's biggest banks also fell, with Mitsubishi UFJ Financial Group, MizuhoFinancial Group and Sumitomo Mitsui Financial Group down 3 percent or more.
Bankers around the world were already fretting about job losses as the prospect of recession in the United States grips financial institutions.
There will be many casualties from the unfolding financial market crisis, which will lead to a large-scale overhaul of international banking regulations, codes and risk management, former Federal Reserve Chairman Alan Greenspan said.
Writing in the Financial Times, the former Fed chief said much of the financial system's risk-valuation models failed, not because they were too complex but because they were "too simple to capture the full array of variables governing that drive global economic reality."
In the event of future consolidation, potential acquirers identified by CreditSights include JPMorganChase, Wells Fargo , US Bancorp , Goldman Sachs and Bank of America , once it works through its recent agreement to acquire Countrywide Financial, the largest U.S. mortgage lender.
Possible foreign bank acquirers include HSBC, Barclays and Canadian firms, said CreditSights, which said the Bear Stearns deal should be good for bondholders.
But the jittery mood means even well positioned banks may be reluctant to take advantage of acquisition opportunities, bankers and analysts said.
"I think M&A is too difficult now," a London banker said. "This is about catching a falling chainsaw. It's not just about cutting yourself if you get it wrong, it's about losing a limb."