CITIC Securities Company Limited, which recently announced it would not be pursuing its cross-investment strategy with The Bear Stearns Cos. Inc. (BSC), probably feels like it dodged a bullet.

The original deal, first mentioned in October 2008, had CITIC, the security firm subsidiary of China’s state-controlled CITIC Group, making a $1 billion investment that would convert to a 6% stake. The terms of the agreement amounted to a Bear Stearns stock price of approximately $120 per share.

But before the deal was finalized, Bear Stearns suffered a liquidity crisis that sent its share value plunging and ultimately resulted in a U.S. Federal Reserve-backed buyout by JPMorgan Chase & Co. (JPM) at a rock-bottom price of only $2 per share.

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"The preconditions and basis for the strategic cooperation agreement announced on Nov. 2, 2007, do not exist any more after the JPMorgan acquisition," CITIC Securities said in a statement last week. "As a result, the company has decided to terminate cooperation plans with Bear Stearns including originally planned investments by Bear Stearns and CITIC Securities in each other."

The agreement, which had Bear Stearns investing $1 billion in CITIC for an eventual 2% stake, was still awaiting final approval. As a result, CITIC was able to withdraw without sustaining any losses.

"Since the company has never signed any formal agreement with Bear Stearns and has never paid any money to Bear Stearns, the company will not bear any losses or investment risk from the termination of the originally planned deal," CITIC Securities said in the statement.

CITIC was able to back out with its $1 billion still intact, but other recent bailout investors haven’t been quite so lucky.

In recent months, sovereign wealth funds have injected more than $70 billion into struggling commercial banks, brokerages and investment-banking institutions – most of them in the West. Most recently, the funds have provided bailout capital to such heavyweights as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS).

Many of those deals were valued at much higher stock prices than the banks are currently trading it. But the deals were made with a mid- to long-term perspective, with plenty of time for the stocks to recover. In addition, the emergency capital infusions left many of the state-controlled funds as the largest stakeholders in the respective banks, a feat that would have been nearly impossible to accomplish on the open market.

And many of these funds, what we here at Money Morning like to call the "Global Cash Barons," are looking for more than just an investment return: They are seeking the deal-making know-how that over time will transform them into global financial titans.

News and Related Story Links:

• Reuters:
  China’s CITIC Sec Says Its Bear Stearns Deal Is Off

• MarketWatch:
  Citic Securities to terminate cross-investment with Bear Stearns

• BusinessWeek:
  Citic’s Close Call with Bear Stearns

• Money Morning:
  Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street"

Down more than $1 billion from his 8.4% stake in crippled financial giant The Bear Stearns Cos. Inc. (BSC), British billionaire Joseph Lewis said he’ll try to steer Bear Stearns away from the U.S. Federal Reserve-backed JP Morgan & Chase Co.’s (JPM) acquisition offer of $2 per share.

Lewis said his shareholder group will take "whatever action that they deem necessary and appropriate to protect the value of their investment in the shares," including lobbying Bear Stearns and third parties to consider another transaction, the Associated Press reported.

Lewis could have in his corner the support of Bear Stearns employees, who collectively hold 30% of the company’s shares. Senior managing directors, who have threatened to vote against the buyout, own many of those shares.

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But JP Morgan is trying to woo those same employees into giving the deal the green light. In a private meeting with Bear Stearns managers, JP Morgan Chairman James Dimon offered cash and stock incentives in an attempt to win takeover approval and prevent key employees from leaving the firm, Bloomberg reported, citing two people familiar with the meeting.

Lewis’ Motivation 

Last summer, Lewis began buying Bear Stearns shares after two of the bank’s hedge funds collapsed. 

But a Securities and Exchange Commission filing shows just how many shares Lewis owns. Lewis filed on Wednesday that he holds 12.1 million shares of Bear Stearns stock through several affiliated investment companies including: Aquarian Investments Ltd., Cambria Inc., Nivon Inc. and other entities, the AP reported.

More than 560,000 of those shares were bought for $55.13 a piece on March 13, just four days before the investment bank nearly collapsed, forcing Bear Stearns to accept JP Morgan’s bail out. 

JP Morgan’s deal was revalued at about $278.5 million, or $2.32 a share, the Wall Street Journal reported.

After dropping to $2.84 a share earlier this week, Bear Stearns stocks have rallied to close at $5.96 yesterday (Thursday), an 11.82% gain. Should Lewis maneuver a buyout at that price per share, he’ll pocket – well, "salvage" is the more correct term – an extra $36.8 million.  

News and Related Story Links:

• Money Morning:
  Bear Stearns’ Friday Stumble, Sunday Sale Reignites Concerns About More Failures in U.S. Financial Sector

• Associated Press:
  British billionaire Joseph Lewis plans action to protect 8.4 pct Bear Stearns stake

• Bloomberg:
  Dimon Offers Bear Stearns Bankers Stock, Cash to Stay

• The Wall Street Journal:
  Lewis Signals Interest In Stopping Bear Deal

Lewis said his shareholder group will take "whatever action that they deem necessary and appropriate to protect the value of their investment in the shares," including lobbying Bear Stearns and third parties to consider another transaction, the Associated Press reported.

Lewis could have in his corner the support of Bear Stearns employees, who collectively hold 30% of the company’s shares. Senior managing directors, who have threatened to vote against the buyout, own many of those shares.

But JP Morgan is trying to woo those same employees into giving the deal the green light. In a private meeting with Bear Stearns managers, JP Morgan Chairman James Dimon offered cash and stock incentives in an attempt to win takeover approval and prevent key employees from leaving the firm, Bloomberg reported, citing two people familiar with the meeting.

Lewis’ Motivation 

Last summer, Lewis began buying Bear Stearns shares after two of the bank’s hedge funds collapsed. 

But a Securities and Exchange Commission filing shows just how many shares Lewis owns. Lewis filed on Wednesday that he holds 12.1 million shares of Bear Stearns stock through several affiliated investment companies including: Aquarian Investments Ltd., Cambria Inc., Nivon Inc. and other entities, the AP reported.

More than 560,000 of those shares were bought for $55.13 a piece on March 13, just four days before the investment bank nearly collapsed, forcing Bear Stearns to accept JP Morgan’s bail out. 

JP Morgan’s deal was revalued at about $278.5 million, or $2.32 a share, the Wall Street Journal reported.

After dropping to $2.84 a share earlier this week, Bear Stearns stocks have rallied to close at $5.96 yesterday (Thursday), an 11.82% gain. Should Lewis maneuver a buyout at that price per share, he’ll pocket – well, "salvage" is the more correct term – an extra $36.8 million.  

News and Related Story Links:

• Money Morning:
  Bear Stearns’ Friday Stumble, Sunday Sale Reignites Concerns About More Failures in U.S. Financial Sector

• Associated Press:
  British billionaire Joseph Lewis plans action to protect 8.4 pct Bear Stearns stake

• Bloomberg:
  Dimon Offers Bear Stearns Bankers Stock, Cash to Stay

• The Wall Street Journal:
  Lewis Signals Interest In Stopping Bear Deal

Just days after Standard and Poor’s said the U.S. financial sector was through the worst of the subprime crisis, Friday’s near collapse of The Bear Stearns Cos. Inc. (BSC) has re-ignited credit fears and could cause investors to question the future of the four other major U.S. investment banks.

“Even though Bear was probably on the fringe, pushing the envelope anyway, traders are saying that because it happened, it could happen to somebody else,” Brandon Thomas, chief investment officer for Portfolio Management Consultants, the investment arm of Envestnet Asset Management, told CNNMoney.com.

Just one day after leading credit-rating agency Standard & Poor’s (MHP) said that “the end of write-downs is now in sight for large financial institutions,” a collapse in investor sentiment on Friday sent Bear Stearns shares spinning downward by $27 each – or 47.4% – to close at $30, leaving the investment bank on the bring of collapse. That forced Bear to seek emergency funding from JPMorgan Chase & Co. (JPM) and the New York Federal Reserve – an arrangement that’s only intended to buy Bear time to work out a more-complete bailout plan, one that might even include an outright sale.

The sale possibility became a reality yesterday (Sunday) when the U.S. Federal Reserve approved a financing arrangement in which JPMorgan will acquire Bear Stearns in a deal that’s valued at $236.2 million.

The Fed also agreed to fund up to $30 billion of Bear Stearns’ less-liquid assets. U.S. Treasury Secretary Henry Paulson said he believes the moves made yesterday will have a major – and lasting – effect on the U.S. capital markets.

“Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets,” Paulson said yesterday.

Yesterday’s Fed machinations are the latest in a recent string of unusual steps the central bank has taken to counterattack a credit market that’s threatening to spiral out of control – something that could then completely derail the U.S. economy.

But it remains to be seen whether this will mollify investors who have become increasingly concerned about the health of the U.S. investment banking sector.

The Domino Effect

Bear Stearns is the smallest of the five big investment banks, the least diversified, and the biggest issuer of mortgage-backed securities. It was also the first to divulge problems when last spring it revealed that two of its hedge funds imploded.

The four other investment banks are Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS), Lehman Brothers Holdings Inc. (LEH) and Goldman Sachs Group Inc. (GS). Of the four, most analysts believe the Lehman is the most vulnerable.

Shares in Goldman are only down about 12% over the last six months. That’s about the same as the Standard & Poor’s 500 Index. But shares in peer companies Morgan Stanley and Merrill Lynch are off nearly 40%.

That makes Goldman’s earnings this week a critical bellwether, perhaps more for other investment banks than for itself. It still has the strongest balance sheet on Wall Street – strong enough to weather all but the worst economic downturns.

Bear Stearns faces some significant challenges. In addition to the loss of investor confidence, it may also have lost a crucial safety net. Citic Securities Co., China’s largest brokerage by market value, said that it “can’t guarantee” that it will reach a final agreement on a proposed investment in Bear Stearns, Bloomberg News reported yesterday (Sunday).

Citic Securities Co. Ltd. hasn’t signed any “formal agreement” or made any payment, it said in an e-mailed statement late last night. Citic would pay $1 billion for 6% of Bear Stearns, while the New York-based firm would invest the same amount in Citic, Bear Stearns said.

Clearly, there’s a big incentive in shoring up Bear Stearns finances. If Bear goes down, one or more of the other investment banks could follow. The impact on the U.S. economy from such a debt-fueled domino effect could be significant.

For instance, because Bear Stearns does business with a large number of other financial institutions, a failure to meet its financial obligations could cause “a ripple effect,” said Ali Samad-Khan, head of operational risk management consulting for the Enterprise Risk Management practice at Towers Perrin.

“They probably fall into the too-big-to-fail category,” Samad-Khan added. “The fact is, [the Fed] recognized that this is an important enough issue for them to get involved in.”

And that’s why the Fed has stepped in to make sure that doesn’t happen. If Bear Stearns fails, and it could, it would potentially spark a run on other investment banks.

 “I don’t think they can afford to let Bear go,” Charles Geisst, the author of “100 Years on Wall Street,” referring to the New York Fed bailout, told Bloomberg News. “At this particular moment in time, it would be a devastating blow to the markets.”

Bear Stearns has a large network of “counterparties” that include other banks, hedge funds and investors. And if Bear can’t meet obligations to these counterparties, those counterparties will find themselves in serious financial trouble of their own.

Larger firms, such as Citigroup Inc. (C) could see big losses, but at the same time have the balance sheet assets and diversified streams of revenue to survive a big hit. But smaller, less diversified counterparties such as hedge funds are at risk of bankruptcy if Bear Stearns can’t meet its obligations.

And if the hedge funds start failing, it could mean another round of costly write-downs for banks that have already taken billions of struggling hedge fund assets onto their own books.

A long list of banks that includes HSBC Holdings PLC (HBC), Dresdner Bank AG Citigroup, Bank of Montreal (BMO) and WestLB AG have pledged support for foundering structured investment vehicles with a total of over $140 billion in assets.

For Bear Stearns, Perception is Everything

"Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,” said Alan Schwartz, Bear Stearns president and chief executive officer in a statement released Friday.

Despite repeated assurances from the bank’s CEO that Bear Stearns was adequately capitalized to meet liquidity needs, the persistent rumors resulted in clients withdrawing assets in cash.

“We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated,” Schwartz added.

In finance, reputation is all-important. And while Bear Stearns now has the funding it needs to keep afloat, it might not be able to gain back the confidence of the market.

“Will you do that foreign exchange trade with Bear? Will you do that bond trade with Bear? And the answer is no because you don’t know whether Bear’s going to be there,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., told Bloomberg News.

If no one is willing to deal, that’s death for an investment-trading firm.

When it became apparent that Bear Stearns would need help, the Federal Reserve tapped JPMorgan to help. It’s a role the bank is familiar with, as this is not the first time JPMorgan has stepped in to help an ailing financial institution.

“It may be a feather in JPMorgan’s cap that they’re considered able to do this,” Geisst, the Wall Street historian, told Bloomberg News. “The Fed could have chosen any number of banks to do this, and they chose JPMorgan.”

Using JPMorgan as a conduit, the New York Federal Reserve is loaning an undisclosed amount of capital to Bear Stearns for a minimum of 28 days. Bear Stearns management hopes it will be enough to hold the wolves at bay.

“We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations," Schwartz said.

Bear Stearns at the Beginning of the Subprime Mess

It only seems fitting that the investment bank in question was the first to bring the credit crisis to the nation’s attention when two of its funds got into trouble early last summer. 

By August, the two funds were essentially worthless and were forced to file for bankruptcy protection, but the company assured clients that the 84-year old firm had weathered challenging markets before and would do so again.

But the beleaguered investment bank’s troubles were far from over.

While Bear Stearns is only the fifth-largest Wall Street investment firm based on assets, it has a disproportionate level of mortgage-backed securities. Larger banking rivals such as Citigroup and Goldman Sachs are much more diversified. Reports estimate that as much as one-sixth of Bear Stearns’ income came from the repackaging and sale of mortgage assets. And as the subprime crisis has unfolded, the market for such assets has all but disappeared.

After Bear Stearns was forced to take a $1.9 billion write-down in December, James E. "Jimmy" Cayne was forced to step down as CEO. The president at the time, Alan D. Schwartz, was anointed as his successor while Cayne remained on as chairman. 

At the time, some financial industry analysts questioned whether Schwartz, a 30-year Bear Stearns veteran, was the right man for the job.

"I am honored to have the opportunity to lead one of Wall Street’s great franchises," Schwartz said when his appointment was announced. "Bear Stearns has a bright future. Our franchise is rock solid thanks to Jimmy’s leadership; investors, customers and employees should not expect any abrupt changes in the period ahead."

But that wasn’t what shareholders wanted to hear. Change is exactly what investors were looking for after 2007’s dismal performance. Bear Stearns’ stock suffered more than any of the big Wall Street’s other firms, dropping 53% in 2007. The fourth-quarter loss of $854 million was the first in the esteemed firm’s long history.

Meanwhile, other rivals in the troubled sector – including Citigroup and Merrill Lynch – replaced their top managers with industry veterans and company outsiders that brought new ideas to the table. Some experts questioned whether Bear Stearns’ choice of a longtime insider as its new CEO – coupled with Cayne’s commitment to stay heavily involved as chairman – really represented the substantive change required to bring about badly needed improvements in the investment bank’s operations and corporate culture.

Now the long-standing firm might be on the auction block. With such a crisis of confidence, it’s doubtful that Bear Stearns will be able to go it alone. The bank has partnered with Lazard Ltd. (LAZ) to find a white knight that’s willing to step in and help engineer its financial turnaround. Perhaps Bear Stearns will have to look no further than its current ally, JPMorgan, which reportedly has been shopping for a prime brokerage.

Editor’s Note: Money Morning Executive Editor William Patalon III contributed to this report.

Timeline of Bear Stearns’ Troubles

‘Subprime’ Became Household Word When Bear Stearns Funds Faltered

News and Related Story Links:

• Bloomberg: Bear Stearns Gets Emergency Funds From JPMorgan, Fed.
• MSNBC.com: Fed drops lending rate a quarter-point.
• Bloomberg:Money-Market Rates May Rise After Bear Stearns Rescue
• CNNMoney.com:Bear CEO Says Firm Hit By Run On Bank,To Consider Alternatives
• CNNMoney.com:After Bear Stearns, who may be next?
• MarketWatch:Bear Stearns bailed out by Fed, J.P. Morgan
• Bloomberg:Bear Stearns May Not Resume Trading, Bernstein’s Hintz Says
• The Economist:Stripped Bear
• Press Release:Bear Stearns Denies Liquidity Rumors
• Press Release: Bear Stearns Agrees To Secured Loan Facility With JPMorgan Chase.
• Money Morning News:Two Bear Stearns Hedge Funds Declare Bankruptcy, a Third Freezes Assets.
• 24/7 Wall Street: Goldman Sachs (GS) Earnings May Crush Wall St. Further.
• Bloomberg News: Citic “Can’t Guarantee” Investment in Bear Stearns.
• CNNMoney.com: Edgy Markets Lifted By S&P’s Comment That Worst Is Over.

The Bear Stearns Companies Inc. (BSC) Chief Executive Officer James E. "Jimmy" Cayne will retire from his post, effective immediately, but will remain on as chairman of the board of directors, the company said in a statement.

His successor will be long-time insider, President Alan D. Schwartz, who has a 30-year tenure with the firm. 

"I am honored to have the opportunity to lead one of Wall Street’s great franchises," Schwartz said. "Bear Stearns has a bright future. Our franchise is rock solid thanks to Jimmy’s leadership; investors, customers and employees should not expect any abrupt changes in the period ahead."

But that might not be what shareholders want to hear. Change is exactly what investors are looking for after 2007’s dismal performance. Bear Stearns’ stock suffered more than any of Wall Street’s other firms, dropping 53% in 2007. The fourth-quarter loss of $854 million was the first in the esteemed firm’s long history.

Meanwhile, other rivals in the troubled sector – such as Merrill Lynch & Co. Inc. (MER) – are replacing their top managers with industry veterans and company outsiders that bring new ideas to the table. Some experts question whether Bear Stearns’ choice of a longtime insider as its new CEO – coupled with Cayne’s commitment to stay heavily involved as chairman – really represents the substantive change required to bring about badly needed improvements in the investment bank’s operations and corporate culture.

"Cayne’s changing role is not a sign of radical strategic change by Bear," Brad Hintz, an analyst at Sanford C. Bernstein, told MarketWatch. "[Bear Stearns] is a very conservative company, and its management team has largely stayed in its comfort zone over the last decade. We expect that to continue."

While some clearly feel Cayne continuing as chairman is a miracle, if not a mistake, after Bear Stearns’ 2007 performance, the board seems determined to keep the company’s fifth-largest stakeholder around. As of the most recently published reports, Cayne and his wife owned 5.7 million shares of Bear Stearns.

"The question will be, ‘Does [Schwartz] have enough autonomy to change things?’" John Challenger, chief executive officer of Chicago-based placement firm Challenger, Gray & Christmas Inc., told Bloomberg. "Is it still really Jimmy Cayne’s team? Have they just made a cosmetic change, or will they really turn the reins over to this person?"

News and Related Story Links:

• Bloomberg:
  Bear Stearns Turns to Insider Schwartz for New Course

• MarketWatch:
  Bear Stearns seen making few changes with Cayne as chairman

• Money Morning:
  Citigroup Appoints Front-Running Insider Vikram Pandit as New CEO

The Bear Stearns Companies Inc. (BSC) Chief Executive Officer James E. "Jimmy" Cayne will step down as CEO effective immediately, The Wall Street Journal has reported, citing unnamed sources. 

Bear Stearns was one of the earliest casualties of the subprime crisis, when two of the firm’s hedge funds ran into trouble due to widespread exposure to mortgage-backed securities in June of last year.

Bear Stearns stock suffered more than any of Wall Street’s other firms, dropping 53% in 2007. The fourth-quarter loss of $854 million was the first in the esteemed firm’s long history. Cayne and other executive committee members did not receive annual bonuses due to the firm’s poor performance for the fiscal year.

"CEOs at other financial institutions who were less impacted than Bear Stearns by the subprime crisis have been forced out, yet Jimmy Cayne has managed to cling on and will even continue as chairman," Octavio Marenzi, chief executive officer at Boston-based financial services consulting firm Celent, told Bloomberg. "He is truly the Harry Houdini of the boardroom."

Cayne plans to stay on as Chairman. It is believed current President Alan Schwartz will be his successor, although Bear Stearns has yet to make a formal announcement.

"[Cayne's] maintaining the post of chairman is totally inappropriate and an indication that this company’s board has no intention of placing the shareholder first," Dick Bove, an analyst with Punk Ziegel & Co., told MarketWatch.

While some clearly feel Cayne continuing as chairman is a miracle, if not a mistake, the board seems determined to keep him around.

"Jimmy’s been so engaged with the company for a long time, he and [his predecessor, Alan C. "Ace" Greenberg] have been the personification of the company," Bear Stearns board member Henry Bienen told Bloomberg. "Jimmy’s still a huge shareholder. It’s the board’s view that Jimmy would stay very involved."

Cayne joins other CEOs who have stepped down in response to poor performance during recent months. Charles O. "Chuck" Prince III was ousted from Citigroup Inc. (C) in early November and E. Stanley "Stan" O’Neal, former chief executive of Merrill Lynch & Co. Inc. (MER), retired at the board’s urging in late October.

News and Related Story Links:

• Bloomberg:
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• MarketWatch:
  Bear Stearns’ Cayne to step down as CEO, WSJ reports

• MarketWatch:
  Bear Stearns’ CEO to step down: report

• Money Morning:
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Bear Stearns Cos. Inc. (BSC) and Asia’s largest securities firm, China Citic Securities Co., agreed to invest $1 billion in each other.

The deal secures broad access to China investment-banking business for Bear Stearns, who lags in China investments compared to its rival Wall Street securities firms. Its third-quarter profit plummeted 61%, and its stock has fallen 28% year-to-date.

"We are confident that combining our operations in Asia with Citic Securities will greatly benefit Bear Stearns’ global client base and generate substantial new revenue and growth opportunities for the firm," Bear Stearns Chairman and Chief Executive James Cayne said in a company statement.

Government-controlled China Citic will buy 40-year convertible trust preferred securities in Bear Stearns. In return, Bear Stearns will buy six-year convertible debt and five-year options in China Citic. They also plan a joint venture in Hong Kong.

China Citic will buy the equivalent of 6% of New York-based Bear Stearns’ shares and collaborate to sell financial products and services in China, the companies said in a statement yesterday. China Citic could boost its stake of Bear Stearns up to 9.9%.

Bear Stearns’ shares buzzed a few weeks ago when Citic’s announced its interest in investing in Bear Stearns. At the time, Bear Stearns’ was a true value play after its shares had been beaten down by the worldwide credit crunch. China Citic wasn’t the only interested company, as Bear Stearns was talking with Wachovia Corp. (WB), Bank of America Corp. (BAC), China Construction Bank Corp., and Warren Buffet via Berkshire Hathaway Inc. (BRK.A, BRK.B), according to other published reports.

In September, billionaire Joseph Lewis struck a deal when he offered $860.4 million for a 7% stake in Bear Stearns.

If approved by China and U.S. regulators, this will mark the second mainland China purchase in a U.S. bank. The first occurred two weeks ago when China Minsheng Banking Corp. Ltd. acquired a 9.9% stake in San Francisco’s UCBH Holdings Inc. (UCBH).

Both purchases underscore efforts of China banks to expand worldwide. In August, Industrial & Commercial Bank of China Ltd., China’s No. 1 bank by assets, acquired a 79.93% stake in Seng Heng Bank Ltd., which is the third-largest lender in Macau. Last year, China Construction Bank Corp., paid $1.2 billion for Bank of America Corp.’s (BAC) 17 branches in Macau and Hong Kong.

And analysts are forecasting more Chinese banks expanding internationally.

"What you are seeing here is the growth of globalization," Eugene Fram, the J. Warren McClure Marketing Research Professor at the Rochester Institute of Technology College of Business, told Money Morning during an interview about the Minsheng purchase. "It also demonstrates the increasing affluence of China and of Chinese companies, which are now reaching out to extend their global position beyond their own country. This is an embryonic deal – embryonic in that it marks the birth, or beginning, of something very new."

News and Related Story Links:

• Bloomberg:
  Bear Stearns, China’s Citic to Invest in Each Other.

• MarketWatch:
  Bear Stearns’ quarterly net tumbles 61%.

• Money Morning:
  China Citic Looks to Buy Bear Stearns at Bargain Value.

• Money Morning:
  Minsheng Becomes First Mainland China Bank to Invest in a U.S. Bank

Shares of Bear Stearns Cos. Inc. (BSC) soared $2.36 each, or 1.96%, closing at $123.05 yesterday (Tuesday), after China banking giant Citic, a division of China Citic Group announced it was interested in acquiring a stake in the embattled U.S. investment bank.

Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, announced Citic’s intentions yesterday at the 17th Communist Party Congress in Beijing. China Citic will have to get in line if it wants a piece of Bear Stearns, however, as many companies and financial institutions flocked to the downtrodden giant perceived as a value buy.

Bear Stearns has reportedly been engaged in talks with Wachovia Corp. (WB), Bank of America Corp. (BAC), China Construction Bank Corp., and Warren Buffet via Berkshire Hathaway Inc. (BRK.A, BRK.B). So far only billionaire Joseph Lewis has been the only suitor to strike a deal when he offered $860.4 million for a 7% stake in Bear Stearns in September.

Bear Stearns survived the 1929 stock market crash as well as the Great Depression, but of the five largest U.S. securities firms it has been the worst performer this year.  Right now, Bear Stearns stock trades at 1.38 times its book value.  By comparison Goldman Sachs Group Inc. (GS) trades at 2.71 times its value and Morgan Stanley (MS) at 2.06.

According to Bloomberg, Bear Stearns President Alan Schwartz said October 4, that the company will "weather the storm," and denied looking for funds from an outside investor. On the same day Bear Stearns Chief Executive Officer James Cayne was quoted by Bloomberg as saying the group would consider a potential partner only if the deal "brings along geographic, strategic value."

Government restructuring and initial public offerings have left many Chinese companies with a large amount of cash on hand. Last year, Bear Stearns held talks with China Construction Bank but negotiations stalled. Now China Citic is stepping up to the plate after raising 5.4 billion in its IPO earlier this year. The Chinese government has been encouraging its banks to invest in foreign institutions, as a means of developing its own investment banking firms.

Combined with the recent purchase of 9.9% of San Francisco based UCBH Holdings Inc. (UCBH), the proposal has U.S. officials watching the Chinese investment carefully to make sure they are motivated strictly buy financial – and not political – interests. Chinese officials insist that because they are commercially motivated and conservative, Chinese investments in U.S. companies should be seen as a stabilizing influence.

News and Related Story Links:

• Money Morning News:
  CNBC Dismisses Talk of Outside Investor Stepping in at Troubled Bear Stearns.

• Money Morning News:
  Warren Buffett and Berkshire Hathaway Rumored as Bear Stearns Investors.

• Money Morning News:
  Two Bear Stearns Hedge Funds Declare Bankruptcy, a Third Freezes Assets.

• Bloomberg:
  China Citic Group May Bid for Bear Stearns Stake.