The chief executive of Bear Stearns accused traders yesterday of bringing down his securities firm by spreading unfounded rumours designed to induce a panic that led to a run on the group.

Bear Stearns was forced to agree a fire sale to JPMorgan Chase for a fraction of its market value last month after rumours that the firm was on the brink of bankruptcy prompted customers and lenders to pull their money out of the group. “I would say it looked like more than just fear — it looked like people wanted to induce a panic,” Alan Schwartz, the Bear Stearns chief executive, told a congressional hearing in Washington yesterday. “The impetus [for the run] was a lack of confidence, not a lack of liquidity,” he said. “Facing the dire choice of bankruptcy or a forced sale under exigent circumstances, we salvaged what we could to avoid wiping out our shareholders, bondholders and 14,000 employees.”

Christopher Cox, the head of the US Securities and Exchange Commission, said that it was looking closely at whether market participants illegally colluded to short shares in Bear Stearns before its rescue. Bear Stearns, which traded as high as $171 a share last year before falling to about $60 a share at the start of last month, agreed to sell itself to JPMorgan for $2 a share as the banks struggled to put together a deal before Bear melted down altogether.

The deal has since been renegotiated to $10 a share, which equated to just over $1 billion but is still well short of recent trading value.

Mr Schwartz also criticised the Federal Reserve for not opening sooner to securities firms its “discount window” of cheap loans, which traditionally has been confined to commercial banks. He said that it was “highly, highly unlikely” that Bear would have had to be rescued if the window had been extended to securities firms just before, rather than just after, the group was sold to JPMorgan.

Even at such a low price, JPMorgan agreed to buy Bear Stearns only after the Fed said it would underwrite with taxpayers’ money any losses it might suffer on $30 billion of collateralised debt obligations, or pools of mortgage-backed bonds, that Bear owned.

Speaking at the same hearing, Ben Bernanke, the Chairman of the Fed, sought to justify the intervention by revealing that Bear Stearns was only one day from going bust when the central bank stepped in. He said: “It would have had to file for bankruptcy the next day unless alternative sources of funds became available.”

Wall Street pulled $10.4 billion (£5.2 billion) of cash and other highly liquid assets out of Bear Stearns in a single day last month, leaving it with only $2 billion and forcing the stricken firm to approach JPMorgan Chase in desperation, it emerged.

The Countdown:

Sept 20, 2007 Bear Stearns reports third-quarter profit down 61% to $171 million

Oct 22, 2007 Citic, the state-owned Chinese fund, takes 6% stake in the company

Nov 28, 2007 Bear announces it will cut 650 jobs, or 4% of its global workforce

Dec 20, 2007 Bear reports fourth-quarter loss of $854 million

Jan 9, 2008 Jimmy Cayne resigns as chief executive, stays as chairman. Alan Schwartz takes over

Mar 10, 2008 Bear says no truth in rumours of liquidity problems

Mar 14, 2008 Bear announces rescue by JPMorgan Chase and the Fed

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