Bear Stearns Gets Fed Funding, Shares Plummet

By Reuters -  |  Posted 2008-03-14 Print this article Print

Bear Stearns, needing cash, has turned to the Federal Reserve and JPMorgan Chase for emergency funds.

NEW YORK (Reuters) - Bear Stearns, the fifth largest U.S. investment bank, on Friday said a cash crunch forced it to turn to the Federal Reserve and JPMorgan Chase for emergency funds, intensifying fears of a widening global credit crisis and driving its shares down as much as 50 percent.

The 28-day emergency line of finance came just days after Bear, which has been hard-hit by its heavy exposure to the faltering U.S. mortgage market, had dismissed market rumors of a cash crunch and said it still was a healthy player in the global web of trading and finance.

But its line changed on Friday. Bear Stearns' chief executive, Alan Schwartz, in a statement explaining how the bank turned to the Fed and a rival bank, said: "Our liquidity position in the last 24 hours had significantly deteriorated.

"We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."

Shares of Bear, which specializes in mortgage finance and trading, dove to a decade-low on record volume immediately after the news hit, bashing other financial stocks and dragging down both U.S. and European markets. The Dow Jones index was down 235 points to 11,911 in afternoon trade. Bear Stearns shares were down 40 percent at $34.20, after falling as low as $28.42 earlier.

"You've got a run on the bank situation where no one will accept any Bear Stearns collateral no matter what it is," said Brian Barish, president of Denver-based Cambiar Investors LLC, which oversees $8 billion. "This is the nastiest episode I have seen in decades."

"Even if they weren't in a liquidity crisis before, the rumors became self-fulfilling," added Jane Caron, senior vice president and chief economist strategist at Dwight Asset Management in Burlington, Vermont.

The Fed move is latest effort by the U.S. central bank to soothe financial markets in response to a widening credit crisis spurred by rising mortgage defaults.

Bear Stearns has more exposure to the U.S. bond markets than its competitors and has a large mortgage-backed securities business. It was among the first to disclose the impact of the subprime mortgage market meltdown when two of its leveraged hedge funds collapsed last summer, losing $1.6 billion.

Under the agreement, the Federal Reserve Bank of New York and JPMorgan Chase agreed to provide an unspecified amount of secured funding to Bear for up to 28 days. The Fed will provide non-recourse, back-to-back financing to JPMorgan Chase, which said it is "working closely with Bear Stearns on securing permanent financing or other alternatives for the company."

Industry watchers predicted dire consequences for the bank going forward, suggesting that one alternative would probably be a sale.

"With the market's reaction, I'd say stick a fork in them, they're done," said James Ellman, portfolio manager at Seacliff Capital, a San Francisco-based hedge fund. "The company clearly has to choose from a set of unpalatable choices: sell a large amount of equity, sell the company outright, or sell assets and try to hold on and hope for the best."

"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, currency strategist at Dresdner Kleinwort, Frankfurt.

Analysts said the news from Bear, which came just one day after investors had been soothed by a Standard & Poor's report that subprime mortgage-related write-downs are likely more than halfway done, suggested that the full impact of the global credit crisis has yet to be felt.

"This tells you we're not over the worst yet, and there are still some players out there who are vulnerable," said Stephen Dowds, head of international equities at Northern Trust in London. "We expect more transparency next week when we get results from the U.S. financial sector.

Shares of Lehman Brothers Holdings Inc, fell 12.1 percent to $40.44, Morgan Stanley fell 4.8 percent $39.60, and Goldman Sachs Group Inc fell 3.8 percent to


Standard & Poor's on Thursday also said that more write-downs in other areas -- including prime mortgages -- are still possible.

JPMorgan said it does not believe the Bear transaction exposes its shareholders to any material risk.

The U.S. Securities and Exchange Commission said it has been in close contact with the Department of the Treasury, the Federal Reserve and the Federal Reserve Bank of New York during the financing talks.

(Additional reporting by Dan Wilchins and Jui Chakravorty, editing by Leslie Adler)


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