The Federal Reserve responded swiftly to pleas from Bear Stearns that its coffers had “significantly deteriorated” within a 24-hour period as rumors about the bank's situation fueled the Wall Street version of a run on the bank. Central bankers tapped a rarely used Depression-era provision to provide loans, and said they were ready to provide extra resources to combat an erosion of confidence in
Nearly half the value of Bear Stearns, or about $5.7 billion, was wiped out in a matter of minutes as investors felt the bailout signaled that the credit crisis has reached a more serious stage, and now threatens to undermine the broader financial system — and the
“My guess is by next week, there will be rumors of other large, familiar institutions” that might be in financial trouble similar to Bear Stearns, said Anil Kashyap, a professor at the Graduate School of Business at the University of Chicago.
No one has disclosed how large the financing offered to Bear Stearns is.
Bear Stearns, the nation's fifth-largest investment bank, made its fortune dealing in opaque mortgage-backed securities — a strategy that backfired amid the worst housing slump in a quarter century. The bank has racked up $2.75 billion in write-downs since last year, and releases first-quarter results on Monday that could show more losses.
Alan Schwartz, Bear Stearns' chief executive, said the bank had enough money to keep operating at the start of the week. However, market speculation swelled Thursday — leading investors, customers and lenders to withdraw their business or rescind credit lines.
By that night, Schwartz said the bank recognized that the pace of withdrawals could outstrip the company's resources. He then contacted JPMorgan Chase & Co. — the third-largest
JPMorgan, which has been hurt far less by the mortgage morass than other investment banks, is providing secured funding to Bear Stearns for 28 days, and those loans will in essence be insured by the Federal Reserve. Schwartz said this will buy Bear Stearns time — allowing it to “convince customers and counterparties that we have the ability to fund ourselves every day, to do business as usual.”
Schwartz confirmed, as many on Wall Street suspected, that Bear Stearns could now be up for sale. He told analysts during a conference call that the short-term funding “is a bridge to a more permanent solution.” Bear Stearns is working with investment bank Lazard Ltd. to explore its options.
Top executives from Bear Stearns and JPMorgan were discussing the outright sale of Bear Stearns to JPMorgan, according to a person familiar with the talks who was not authorized to speak on the record.
The next 28 days could provide JPMorgan with the time needed to complete due diligence on Bear Stearns before buying the company, giving detail about how much risk is on the books.
JPMorgan is considered to have one of the strongest balance sheets among Wall Street banks, and is not already involved in a rescue like Bank of America's purchase of Countrywide. In a memo sent to employees, Schwartz said the temporary financing would allow the company to “get back to business as usual.”
Bear Stearns, which has about 14,000 employees worldwide, has struggled since two hedge funds under its control lost billions of dollars after investing heavily in securities backed by pools of subprime mortgages.
“They were the dominant firm for repackaging mortgages,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC. “That's where all earnings came from. They had the least diversified earnings stream of all of Wall Street securities firms, and as a result, they're paying the price today.”
As delinquencies and defaults swelled among subprime mortgages — given to customers with poor credit history — investors shied away from purchase securities backed by the troubled loans. Those fears expanded to encompass all but the safest bonds and securities, forcing investment banks to significantly reduce the value of their holdings and drying up liquidity throughout the market. The broader financial services sector has amassed nearly $160 billion in write-downs since the middle of last year.
JPMorgan Chase said the financing would not expose its company to any material risk, though its shares dropped 3.6 percent, or $1.37, to $36.74. Bear Stearns plummeted 39 percent, or $22.50, to $34.50. The news rattled investors around the world, pushing the Dow Jones industrial average down about 225 points and pulling other indexes lower.
AP Business Writers Madlen Read in New York and Martin Crutsinger in Washington contributed to this report.