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From The Times

March 15, 2008

Bear Stearns seeks white knight as Fed steps in to avert collapse

Suzy Jagger in New York, Christine Seib, Miles Costello, and Leo Lewis in Tokyo

The Federal Reserve Bank of New York and JPMorgan Chase yesterday teamed up to bail out Bear Stearns in a move that saw America’s central bank invoke emergency loan legislation for the first time in 50 years.

Bear Stearns, America's fifth largest investment bank, warned Wall Street that it was not certain it would survive but that it was seeking alternative means of funding. Shares in the bank plunged to their lowest level for a decade, and it confirmed it had asked fellow investment bank Lazard Brothers to advise on the options for its future, including a sale or break-up.

Despite the state intervention, traders were dubious on its chances. Hedge funds and prime brokerages shut down their trading positions with the bank, increasing the likelihood of it running out of cash. The cost of insuring against its collapse soared to an all-time high late on Friday, and Moody's, the credit-rating agency, warned the bank faced an uncertain future "if a long-term stabilising solution is not quickly achieved".

The predicament of America’s fifth largest investment bank triggered a 250-point fall on the Dow Jones industrial average, which ended the day down 194.60 points at 11951.10, and a surge in Treasury bond-buying as traders dived towards safe assets amid fears that Bear Stearns may go bust.

Bond traders immediately priced in an interest rate cut of three quarters of a percentage point when the Federal Reserve Bank meets next week, bigger than the 50-basis-point cut previously expected. The bigger reduction would take the cost of borrowing to 2.25 per cent.

In a statement yesterday morning, Bear Stearns said: “Our liquidity position in the last 24 hours had significantly deteriorated.”

The bulk of Bear Stearns’s business is derived from its mortgage and fixed-income business, which means that it has been particularly exposed to the housing crisis in America and the credit crisis that erupted in the summer. The bank explained that it had appointed JPMorgan Chase as an adviser to examine how to secure long-term financing and that its bigger rival had agreed to lend Bear Stearns funds for 28 days on a secured basis. Bear Stearns also managed to secure an emergency loan from New York’s Federal Reserve Bank. It is not known what either bank is charging for the loans, or what is their size.

The loan required America’s central bank to invoke an emergency safeguard of the Federal Reserve Act, called the 10b5 provision, which allows Washington to lend any US corporation money if no other funding is available and where the demise of that company threatens the US economy as a whole. The provision has not been invoked for 50 years.

Alan Schwartz, chief executive of Bear Stearns, said yesterday: “Concerns on the part of our counterparts and customers got to the point where a lot of people wanted to get cash out. We were meeting those needs but they accelerated late in the day. The pace things were going meant that liquidity demands would have outstripped liquidity resources.”

Mr Schwartz added that the bank’s adviser, Lazard Brothers, the investment bank, told its client to approach the New York Federal Reserve and JPMorgan.

JPMorgan and Lazard are seeking ways of securing long-term funding for the bank, but Bear Stearns gave warning that “the company can make no assurance that any strategic alternatives” to fund itself in the long term “will be successfully completed”.

Bankers outside Bear Stearns believe that the collapse of the Carlyle Capital Corporation, an investment fund owned by Carlyle, the US private equity giant, on Thursday was the nail in Bear Stearns’s coffin.

The bank, which was heavily involved in lending to hedge funds, had lent about $1.6 billion (£791 million) to CCC and may have been forced to take mortgage-backed securities in lieu of its cash when the fund went bust. But the value of the securities plunged, fuelling existing fears that Bear Stearns was running out of money. As a result, the bank’s lenders started calling in their loans.

$415 trillion,how many noughts is that,does such an amount of money exist.The way the dollar is falling,it'll be loose change soon.

stephen hulton, eure, france

I don't want to come across as bing clever after the event, be you could see what's happening today a mile off.

What i think is really concerning though is that the current American administration will not and cannot admit there's a massive link between what's going today and the war in Iraq. You need energy (oil) to fight a war. Due to this, higher oil prices have a direct effect on family, city and state budgets; they also led to a drop in GDP. Interest rates finally rise in response, hundreds of thousands of home owners find that they are unable to keep up payments, causing defaulted mortgages that has put the US on the brink of recession and brought down Northern Rock/Bear Stearns.

To cut a long story short, one day (and not to far in the future.) the news is simply going to be "America has no more money". It severs them and their allies right for being fueled by greed. Economies fueled by greed, a war fueled by greed. Sounds harsh, but it's the truth.

richard, gibralter,

Loaning 30-times the money I don't have to someone who loans 30-times that to someone else would get me arrested for fraud. How do these types get away with it. Add in the wheat crisis, the rice crisis...Maybe Nostrdamus was only ten years out.

F. Drake, Miries, Greece

The problem with the apparently huge numbers that are being bandied about where Northern Rock and now Bear Stearns are concerned is that they pale into insignificance when compared to what is reported to be an overhang of $415 trillion's worth of derivative contracts in the markets today. As early as 2002 Warren Buffet was warning of the dangers they presented when this volume was a lot lower, so why is it that the Fed, the Bank of England and other regulatory bodies throughout the developed world have apparently done nothing about these for so long?

figurewizard, petersfield, hampshire

Have you been borrowing someone else's money to bet on people borrowing money?

Has someone else been borrowing someone else's money to bet on your bet?

Does everybody want their money back now?

Why not consolidate all your bad decisions into one giant mistake!
(...and hand your children the bill)

Albert Hall, Blackburn, Lancashire, UK

This crisis is manmade not market made.

Market forces are not to blame as this situation has been caused by charlatans masquerading as professionals in the financial industry.

The super whizzo financial schemes were concocted and then traded between each other seemingly with zero risk assessments and or due diligence have created the biggest pyramid scam in history.

I havenâ€™t noticed any major political event, cultural shift, war or any other event that has led to this situation, all I see is huge mess caused by seemingly unregulated renegades thinking they were all so clever when the truth is the architects of these events should be getting hounded by their governments and to cap it all, the fed and others are helping them with taxpayers money.

Plus the majority of the perpetrators of these schemes are still working in the sector. untouched and free of the responsibility for this mess and free of personal debt whilse thier "clients" are in misery.

John McDonald, Glasgow, U.K.

The fall of Bear Stearns is the financial services equivalent of the fall of Eliot Spizer.

Even if the rescue package can keep it afloat its global reputation has been tarnished. Eliot resigned but in Bear Stearns case the public spotlight will continue to shine on the intricacies of the operations of the financial system causing the industry further public embarassment.

The savings of the public is tied up in the web of the financial services system and this puts the public in a position similar to Mrs. Spitzer of standing by 'their man' when they may prefer to give him a big slap in the face.

Gregory, Tunbridge Wells, Kent

And for those who wonder where the money went: http://www.deepcapturethemovie.com/

About 20 years of FTDs need burying.

Dion Per Sona, Cardiff, UK,

Has Joe Lewis lost so much money on Bear Stearns ?

Maybe Carlyle should ask its illustrious board to stump up some hard cash rather than ask for socialisation of losses.

Capitalism in the US is becoming Crony Capitalism

Maybe Receivers should sue to return of bonuses paid to bankers ?

TomTom, Leeds, England

The concern here could be that although the American mortgage crisis and hedge fund lending may have scared counterparties and investors, risk scrutiny could now shift to other aspects of investment banking which may not be widely understood, and sometimes lack transparency.

These could include the burgeoning global markets in derivatives, such as the options (including proprietary, 'desk' options) and futures which may now underpin the share prices of some global companies.

Typically, a relatively small payment can buy rights for a limited period to much larger assets, which can be renewed on expiry.

Although these instruments add stability to share prices, facilitate short term trading of pricing discrepancies and help in averting panics by providing liquidity, deleveraging the sector in an orderly way as part of wider credit contraction could be no simple matter.

dr venables preller, Warminster, UK

This Bear Sterns failure is just first of a long list to come in a category that until now has managed to keep its troubles secret. The way to resolve the primary cause of our current crisis (money supply) is actually quite simple. But, it is the solution that must never be mentioned or discussed; taking the Private Banks out of the money creation and distribution scenario as in, "Close The Fed". 5 Presidents including Lincoln and Jackson used this solution and immediately solved the financial crisis of their eras, paid off the national debt in 3 years or so, and in some epochs, did away with income tax!
The USA has so much natural wealth and HARD workers that if there is a fairer distribution of the money supply by placing it in the hands of the Treasury Department (one of our Constitutional Rights), not a single citizen ever need be the financial slave of a bank again. I suggest you see the internet film on Google, "The Money Masters." where all is explained in detail.

victor compton, Cherbourg, France