US Fed bails out Bear Sterns through JPMorgan Chase

15 March 2008

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.