NEW YORK — On the verge of a collapse that could have shaken the very foundations of the U.S. financial system, investment bank Bear Stearns Cos. was bailed out yesterday by a rival and the U.S. government. The near-miss raised new alarm about the credit crisis — and whether other big firms might be in jeopardy.
The rescue came from JPMorgan Chase & Co. and, in an extraordinary step, the Federal Reserve, both rushing to pump new money into the venerable Wall Street firm after its financial state deteriorated so much in a 24-hour period that it threatened to fail.
Bear Stearns stock lost nearly half its market value, about US$5.7 billion, in a matter of minutes, and pulled the broader market down with it. The Dow Jones industrial average fell nearly 200 points.
If Bear Stearns were to go under, “it has the potential of bringing down the whole market,” said Richard Bove, an analyst at Punk, Ziegel & Co. “This is the crescendo of the crisis.”
JPMorgan and the central bank agreed to extend loans for 28 days to Bear Stearns, the fifth-largest U.S. investment bank and the one hit hardest by the subprime mortgage mess. Two hedge funds managed by Bear Stearns failed last summer, setting off a credit crisis that has swept up banks and brokerages around the globe.
In backing up JPMorgan, the Fed dusted off a rarely used, Depression-era provision for loans. It also said it was ready to fight an erosion of confidence in the largest U.S. financial institutions.
US investment bank Bear Stearns has said it has been forced into a funding bail-out.
It is a move which raises the spectre of crisis-hit mortgage lender Northern Rock.
Bear Stearns said a cash crisis for the business had worsened in the past 24 hours.
The company’s shares had fallen almost 20% in the past week as doubts over its funding position spread through the markets.
The firm will access funds from fellow investment bank JP Morgan Chase and the US Federal Reserve for an initial period of up to 28 days.
Bear Stearns blamed “market chatter” for its deteriorating liquidity position, and said the cash injection would allow it to continue normal operations.
The Bear Stearns bail-out worsened fears over the impact of the credit crunch on the global banking system and sent stock markets in London and New York plunging into the red.
CEO Alan Schwartz said: “Bear Stearns has been the subject of a multitude of market rumours regarding our liquidity.”
The bank said it was in talks with JP Morgan over “permanent financing or other alternatives” – likely to include a takeover.
But it gave no guarantees that any alternatives for the business would be successfully completed, sending its shares plunging by almost half as investors feared the worse.
– BAILOUT: JPMorgan Chase will lend Bear Stearns money for 28 days, with a backup guarantee from the Federal Reserve Bank.
– NO CASH: Bear Stearns says it ran into problems within 24 hours amid a spike in demand from people trying to get their cash out of the firm.
– PLUNGING VALUE: As the end of trading yesterday, Bear Stearns had lost more than $5 billion in market value and was trading at its lowest point in nine and a half years.
related//Bloomberg: Bernanke Discards Monetary History With Bear Stearns Bailout