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Bear Stearns Gets Bailout From the Federal Reserve

CNBC.com
Friday, 14 Mar 2008 | 9:34 AM ET

The Federal Reserve agreed to provide emergency financing to Bear Stearns, after the
investment bank said its cash position had deteriorated sharply in the past 24 hours.

The short-term financing from the Fed Bank of New York is being arranged through JPMorgan Chase. Bear said the financing is intended to help shore up confidence in its operations.

Bear Stearns shares plunged after the news of the financing, the

CNBC.com

Standard & Poor's cut some of its credit ratings on Bear Stearns later in the day, reducing its long-term counterparty rating to "BBB" from "A" and its short-term rating to "A-3" from "A-1."

The agency also placed the bank's long- and short-term ratings on negative watch, meaning they could be downgraded in the next three months.

The firm also faces a credit rating downgrade later today by at least one of the ratings agencies, the Wall Street Journal is reporting. Officials at Standard & Poor's and Moody's were meeting to discuss whether the downgrade is warranted.

Read Live Blog From Bear Stearns Conference Call.

JPMorgan will provide a secured loan facility for an initial period of up to 28 days, allowing Bear Stearns to access liquidity as needed. J.P. Morgan also said it's working with Bear to secure permanent financing or "other alternatives" for the brokerage firm.

The Fed said it unanimously approved a new funding arrangement for Bear and said it would keep pumping liquidity into the U.S. financial system.

"Our liquidity position in the last 24 hours had significantly deteriorated," Bear CEO Alan Schwartz said in a statement. "We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."

Schwartz added that "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction."

Bear Stearns Recap
Highlights from his discussion with Bear Stearns CEO Alan Schwartz, with CNBC's David Faber

Schwartz made similar comments to CNBC on Tuesday, when Bear's stock was tanking on market rumors. Schwartz said then that there were no imminent threats to the Wall Street investment bank's liquidity despite rumors to the contrary.

"Part of the problem," he said in Tuesday's interview, "is that when speculation starts in a market that has a lot of emotion in it, and people are concerned about the volatility, then people will sell first and ask questions later, and that creates its own momentum." Watch the full interview at left.

Bear Stearns, the fifth-largest U.S. investment bank, has more exposure to the U.S. bond markets than its competitors, and has a large mortgage-backed securities business.

Standard & Poor's said on Thursday that subprime mortgage-related write-downs are likely more than halfway done, but more write-downs in other areas--including prime mortgages--are still possible.

The Wall Street Journal reported on Thursday that some clients are increasingly reluctant to trade with Bear Stearns, and that hedge funds are moving assets away from the investment
bank's prime brokerage.

Financial market traders across London have been told by their firms to stop dealing with Bear Stearns, sources in several dealing rooms told Reuters.

At least six major institutions in London -- including Commerzbank, Royal Bank of Scotland and JPMorgan -- had stopped giving prices to the U.S. bank, a credit trader at one European institution in London, who declined to be identified, said.

"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.

"It raises severe concerns over other banks. (Bear Stearns) wasn't a small bank, it was the second largest underwriter of mortgages last year. For the situation to deteriorate in that
way is not good news and it will add further to jitters," he added.

According to Cumberland Advisors Chief Investment Officer David Kotok, the problem is bigger than Bear Stearns.

"This is about the system," he said. "It is about the ...frozen mortgage-back constructed paper and how you thaw it out and get a liquid market and get it trade...This is about getting liquidity to markets which are dysfunctional and seized up."

Some analysts also believe that the Fed is wading into dangerous territory by helping Bear.

"The Fed is taking all the risk in this (JPMorgan Chase-Bear Stearns) arrangement," Pierre Ellis, senior economist at Decision Economics in New York, told Reuters. "They are exposing themselves to a non-member institution which is highly unusual, if not unprecedented. They could have (made the loan) directly, but they chose not to."

Ellis added: "Clearly the Fed is addressing what they feel is a systemic risk very aggressively which should support market confidence that no total market freeze will be allowed to happen. The financial system is so intertwined that if a firm as big as Bear Stearns were to go under, it would take weeks to find out who owes what to whom, which would add another convulsion to a financial market that is already quite paralyzed. There is no doubt about the creativity of the current Fed."

--Reuters contributed to this article.

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