After Thursday's news of Carlyle Capital's imminent collapse, comes word of the US Fed's intervention in Wall Street yesterday. Investment bank Bear Stearns, the fifth largest on the Street, is going to get emergency funding for 28 days from JPMorgan Chase, underwritten by the Federal Reserve.

JPMorgan is also trying to get long-term financing for Bear Stearns.

Bear Stearn's financial woes stem from its exposure to mortgage-based securities, same as most other banks and funds reeling from the sub-prime crisis. At the end of last year, it reported that it had made its first ever quarterly loss after buying investments linked to the US mortgage market. These losses are now expected to total up to around $3.5 billion.

This bailout has resulted in investors and analysts pressing the panic button, with shares of Bear Stearns plummeting by 53 per cent to $28 after the plan was announced. Many are of the opinion that this malaise of a credit crunch has spread wider than it seemed initially, and that many others banks and funds may be at risk.

The management of Bear Stearns tried to put up a brave face in this crisis, saying that a lot of recent speculations on the bank's fortune have required them ''to confront and dispel these rumours and parse fact from fiction''. However, Alan Schwartz, president and chief executive officer of Bear Stearns, said that this infusion of funds is necessary for continuing normal operations. "We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations," he said.

Bear Stearns had been one of the first to admit it had problems linked to sub-prime mortgages, after two of its hedge funds had to be bailed out in summer last year. Sub-prime referred to people who had poor credit histories and yet had been offered loans by banks and financial institutions in order to purchase houses.

As the housing market in the US collapsed due to the rise in the home loan mortgage rates, a record number of borrowers defaulted on their loans leading to what is now known as the sub-prime crisis, where securities based on these loans declined in value. The subsequent freezing-up of the credit markets created problems for a number of companies that relied on borrowing money to fund their businesses.

As the value of its mortgage-linked assets fell, Bear Stearns found itself short of cash to fund day-to-day operations. Any attempt by it to raise cash by liquidating its assets in the open market would have resulted in their values declining further, resulting in a snowballing crisis that would have immediately affected other banks holding such assets.NN
The net result would have been a drying up of credit and a general slowdown in the entire economy. That is why the Federal Reserve felt it had no choice but to intervene to support a short-term rescue deal.

However, due to technical issues of Bear Sterns being an investment bank and not a commercial bank, the Federal Reserve had been unable to lend it money directly. Hence, one of the biggest US commercial banks, JPMorgan Chase, is being used to route the emergency funds to Bear Sterns to prevent  its collapse that would pull down other  banks.

Accordingly JPMorgan has made a short-term loan underwritten by the Federal Reserve that poses no risk to its own shareholders.

Bear Stearns, founded in 1923 by Joseph Bear, Robert Stearns, and Harold Mayer, is one of the largest global investment banks and securities trading and brokerage firms in the world. Before the current crisis, it had a market capitalisation of $60 billion and assets under management of $350 billion, and a global workforce of 15,000. Now, its future existence as an independent bank is under threat.

JPMorgan Chase, formed in 2000 when Chase Manhattan Corporation acquired JPMorgan & Co., is currently the third largest banking institution in the United States after Citigroup and Bank of America. The company, headquartered in New York City, is one of the leaders in investment banking, financial services, asset and wealth management and private equity.

Its hedge fund unit is the largest in the world. It has been comparatively less affected by the sub-prime mortgage crisis than the other financial heavyweights, and analysts expect it to take a major part in any future restructuring of Bear Stearns, if and when it happens.