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JP Morgan Chase agreed to increase its bid to take over investment bank Bear Stearns to $10 a share. The latest bid is an increase over the $2 per share announced March 16^th.

In the latest sign of the ongoing credit crisis, investment bank Bear Stearns agreed on March 16th to be taken over by JP Morgan Chase. The original price of $2 a share was a stunning collapse of one of the oldest investment banks on Wall Street. The $2 per share price values the company at $236 million, compared to a value of $8.3 billion two weeks earlier.

The sale was made necessary because of a classic “run on the bank.” Numerous clients had demanded their money from Bear Stearns due to rumors of poor financial health. Since Bear Stearns is so leveraged it could not meet the demands and required an immediate increase in funds. JP Morgan agreed to take over Bear Stearns liabilities. In an unusual move the Federal Reserve provided a $30 billion credit line to JP Morgan to facilitate the transaction.

In the updated terms announced today, JP Morgan will also receive 39.5% of Bear Stearns by buying 95 million newly issued shares. The newly issued shares and higher price are aimed at ensuring the deal goes through and to appease shareholders unhappy with the original lower price. The Fed’s role was renegotiated to guarantee $29 billion, instead of $30 billion, of Bear Stearns assets while JP Morgan will now absorb the first billion of potential losses.

Bear Stearns was one of the largest providers of collateralized debt obligations (CDO’s) the last five years. CDO’s are financial products that pool home mortgage securities and then are sold to investors. The CDO’s were a major force in the increase in subprime mortgage lending which contributed to the recent housing inflation and bubble. The decrease in home prices has caused the CDO’s to drop in price causing hundreds of billions in losses for banks, brokerages and investors.