Bear Stearns is one of the best-known US Wall Street firms -
US bank Bear Stearns has got emergency funding, in a move that raises
fears that one of Wall Street's biggest names is on the verge of
collapsing.
JP Morgan Chase will provide the money to Bear Stearns for 28 days
with the Federal Reserve of New York's backing.
JP Morgan is also trying to get long-term financing for Bear Stearns.
Bear Stearns' problems stem from the global credit crunch and the
worry is that other lenders may also have major funding problems,
analysts said.
Bear Stearns is Wall Street's fifth largest investment bank, and has
been at the centre of the US mortgage debt crisis. Recently,
speculation had intensified that it was struggling to fund its daily
business.
The company's creditors have become progressively concerned about
Bear's exposure to mortgages, said BBC business editor Robert Peston.
"The rescue of Bear Stearns demonstrates that the worst of the global
credit crunch is not yet behind us," he said.
He says that if Bear Stearns had been allowed to collapse, it could
have put the whole financial system at risk.
Bear Stearns shares dropped as much as 53% to $28 on the news.
'Other banks'
The credit crunch was caused because banks became less willing to lend
to each other after they suffered large losses on investments linked
to the US housing market, and the sub-prime sector in particular.
Our liquidity position in the last 24 hours had significantly
deteriorated
Sub-prime lenders focus on clients with poor or non-existent credit
histories, and a record number of borrowers have defaulted on loans.
The subsequent freezing-up of the credit markets created problems for
a number of companies which relied on borrowing money to fund their
business.
In the UK, Northern Rock ran into trouble when its line of relatively
cheap credit dried up.
At the end of last year, Bear Stearns re****ted that it had made its
first ever quarterly loss after buying investments linked to the US
mortgage market.
It was 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.
Analysts said that Bear Stearns may not be the only bank suffering in
the US.
"The situation is very much that Bear Stearns was very close to the
edge and it was much worse than we all thought," said Michael
Klawitter of Dresdner Kleinwort.
"It raises severe concerns over other banks."
'Restore confidence'
Alan Schwartz, president and chief executive officer of Bear Stearns,
said: "Bear Stearns has been the subject of a multitude of market
rumours regarding our liquidity.
"We have tried to confront and dispel these rumours and parse fact
from fiction.
"Amidst this market chatter, our liquidity position in the last 24
hours had significantly deteriorated," he added.
"We took this im****tant step to restore confidence in us in the
marketplace, strengthen our liquidity and allow us to continue normal
operations."
BBC business editor Robert Peston said that the move by JP Morgan and
the Fed of New York was essentially a central bank bailout.
"In just the last 24 hours Bear Stearns came close to running out of
the cash or liquidity it needs to meet its daily requirements," he
said.
"So enter the US Federal Reserve. It is promising to supply whatever
liquidity is required by JP Morgan Chase, the leading bank, to help
Morgan provide whatever funds are required by Bear Stearns.
"Since JP Morgan is saying there is no risk to its shareholders, this
represents a central bank bailout of Bear Stearns.
"This is America's Northern Rock."
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