Bear Sterns

Reuters: JPMorgan completes takeover of Bear Stearns

JPMorgan Chase & Co said on Saturday it completed its $1.4 billion Bear Stearns Cos takeover...

Weakened by its massive exposure to mortgage markets and the embarrassing blow-up of two of its hedge funds, Bear was driven to the brink of bankruptcy in March by traders who drained about $17 billion of the firm's cash in a matter of days.

...backed by a Federal Reserve bailout of $30 billion in Bear assets.

...Bear employees, who collectively held 33 percent of the firm's stock and saw billions of dollars in their personal wealth wiped out.

That $30 billion is taxpayer money. The money backs some very questionable securities that may or may not be of any value, with 'may not' as the probable. If they are of no value then, the taxpayer will lose $29 billion on this deal.

The Fed has extended a loan, not given away money. The central bank has agreed to lend JPMorgan $29 billion as an enticement to buy the troubled Bear and its liabilities. As collateral, JPMorgan is putting up $30 billion worth of mortgage-backed securities and other complex investments, which are basically the most problematic assets on Bear's books. JPMorgan has to repay the Fed loan with interest at the "discount rate," which is currently 2.5 percent.

The risk to the Fed—and to taxpayers—is what happens to those troubled securities, which the Fed is essentially insuring. If they end up being completely worthless, then the Fed would be out the whole $29 billion. Under the terms of the deal, JPMorgan would pony up the first $1 billion in losses. source