Bear Stearns Gets Emergency Funds From JPMorgan, Fed
By Yalman Onaran – Bloomberg.com March 14, 2008
Bear Stearns Cos. shares plummeted a record 53 percent after the New York Federal Reserve and JPMorgan Chase & Co. stepped in to rescue the fifth-largest U.S. securities firm with emergency funding.
After denying earlier this week that access to capital was at risk, Bear Stearns said today that its cash position had ``significantly deteriorated'' in the past 24 hours. The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today.
The regulator stepped in to prevent the collapse of the second-biggest underwriter of U.S. mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week. JPMorgan, which has suffered fewer losses than rivals during the credit crisis, may end up owning all or part of Bear Stearns, analysts speculated.
``I don't think they can afford to let Bear go,'' said Charles Geisst, the author of ``100 Years on Wall Street,'' referring to the New York Fed bailout. ``At this particular moment in time, it would be a devastating blow to the markets.''
Bear Stearns acted in response to ``market rumors'' of a liquidity crisis, Chief Executive Officer Alan Schwartz said in a separate statement. He said earlier this week that the company's ``liquidity cushion'' was sufficient to weather the credit-market contraction. Traders have been reluctant to engage in long-term transactions with Bear Stearns as the counterparty, the Wall Street Journal reported yesterday.
``We have tried to confront and dispel these rumors and parse fact from fiction,'' Schwartz said in the New York-based company's statement today. ``Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.''
Bear Stearns said it was in talks with New York-based JPMorgan ``regarding permanent funding or other alternatives.'' The broker's shares fell $22.62, or 39.7 percent, to $34.38 at 12 p.m. in New York Stock Exchange composite trading, after sinking as low as $26.85 earlier today. The stock has lost about 60 percent of its value this year.
The Bear Stearns bailout was announced hours before President George W. Bush delivered a speech on the economy. ``Our economy obviously is going through a tough time,'' he said to business and finance leaders at the Economic Club of New York. ``In the long run I'm confident our economy will continue to grow because the foundation is solid.''
Bear Stearns led Wall Street shares lower this year as the world's largest lenders and securities firms wrote down assets linked to the subprime mortgage market. The company's fourth- quarter loss of $854 million was its first, and analysts in the past month have lowered expectations for earnings in the first quarter. JPMorgan has posted $3.7 billion in writedowns, far less than the $22.4 billion reported by Citigroup Inc., the biggest U.S. bank by assets.
``JPMorgan is not loaded up with bad mortgage debt,'' said Vincent Farrell, principal at Scotsman Capital Management. ``Bear has a couple of very good pockets that any other firm would want to have if you can clear up the balance sheet issue.''
The failure of two Bear Stearns hedge funds invested in mortgage securities triggered the collapse of the subprime home loan market in July, prompting a sell-off of the assets. Bear Stearns lost customers during the period, though they were returning recently, according to executives at the firm.
About one sixth of the firm's income derived from packaging and trading mortgage bonds, a market that has almost completely frozen since July.
``The future for Bear will be found in a forced marriage,'' said Charles Peabody, an analyst at Portales Partners LLC in New York who rates the stock a ``sell.'' ``Their business model is broken. They don't have the ability to go it alone.''
The Fed said it's ``monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system.'' The vote to approve the financing was unanimous, the Fed said.
``The issue now is whether Bear Stearns customers will stick around,'' said Bruce Foerster, president of South Beach Capital Markets and a former Wall Street executive. ``Some others have gotten through the same kind of troubles, some ended up being shut down or sold. I'm hoping Bear can get past it.''
JPMorgan's participation in the bailout follows a long tradition of the 209-year-old bank helping rescue the financial markets from crisis, according to Geisst, the Wall Street historian.
``It may be a feather in JPMorgan's cap that they're considered able to do this,'' Geisst said. ``The Fed could have chosen any number of banks to do this, and they chose JPMorgan.''
Last updated 16/03/2008