Emergency funding for Bear Stearns

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emergency funding for Bear Stearns
By Aline van Duyn, Anuj Gangahar, Stacy-Marie Ishmael and Ben White in New York and Krishna Guha in Washington

Published: March 14 2008 14:05 | Last updated: March 14 2008 14:44

Confidence in Bear Stearns collapsed on Friday after the US investment bank said it had arranged for an unspecified amount of emergency funding from JP Morgan and the Federal Reserve Bank of New York because its liquidity position had “significantly deteriorated”.

In early New York trading, Bear Stearns shares plunged as much as 50 per cent, pulling the rest of the US stock market down. The shares have been hammered by concerns about the bank’s liquidity and had fallen more than 30 per cent this week alone in highly volatile trading.

In a statement, JP Morgan Chase said that “in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.

”Through its discount window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase. Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk. JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company.”

The Federal Reserve, the central bank, said in a statement that it was “monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system. The board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear Stearns this morning.”

Shares in Bear Stearns were down 46 per cent at $30.60 just after 10.00am New York time. Shares in other financial institutions also fell sharply, and the S&P investment banking index fell 2.5 per cent. JP Morgan was down 3.3 per cent at $36.85.

The investment bank is set to issue its first-quarter earnings report on Thursday. Bear has taken big losses on mortgage-related securities, and reported its first net loss ever in the fourth quarter of last year.

Bear executives have tried to dismiss rumours buzzing around the industry, insisting that they have plenty of cash on the balance sheet and should meet analyst expectations, which has been adjusted dramatically lower. “Our balance sheet has not weakened at all,” Alan Schwartz, president and chief executive, said on Thursday. “We don’t see any pressure on our liquidity.”

But in the last days, investors have grown increasingly worried about the investment bank’s exposure to Carlyle Capital and other troubled investment funds. Specifically, there were concerns that if Bear had to seize collateral in the form of mortgage-backed securities from Carlyle and other funds, it might then have trouble selling these assets, leading to further losses and write-downs.

On Friday Mr Schwartz said in a statement that the bank’s liquidity had ”significantly deteriorated” in the last 24 hours.

“Bear Stearns has been the subject of a multitude of market rumours regarding our liquidity. We have tried to confront and dispel these rumours and parse fact from fiction. Nevertheless, amidst this market chatter, 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,” he said.

The statement added Bear Stearns could make ”no assurance that any strategic alternatives will be successfully completed.”

Through this mechanism, the Fed is giving Bear indirect access to its crisis liquidity provision facility, the discount window. Bear Stearns cannot access it directly, as it is an investment bank and not a commercial bank. By asking JP Morgan to act as the middle man, however, Bear can access this facility.

JP Morgan is expected to lend to Bear, taking the collateral, and then refinancing the collateral with the Fed at the discount wind.