14 March 2008

Fed Bails Out Bear Stearns, Uses J.P. Morgan as 'Conduit'

The shock of the morning was the 'news' that the Federal Reserve Bank of NY was stepping in to accept the collateral of Bear Stearns in order to prevent the company from insolvency. The shock was that just yesterday the CEO of Bear Alan Schwartz reassured investors that the company had no problems, that their "liquidity was strong." Today we hear that the situation deteriorated 'overnight.'

You will no doubt hear spin and interpretation about this bailout. Here are a few key points that we can state with some level of confidence.

  • The Fed is acting as 'lender of last resort' and saving Bear Stearns from insolvency.

  • J.P. Morgan is acting as agent or a conduit for the Fed. They are not accepting the risk.

  • Bear Stearns could not wait until March 27 when they would have had direct access to the new TSLF. The situation at Bear is so bad that no other bank on the Street would consider providing funding.

  • The Fed stepped up in what can only be described as an extraordinary action not seen since the bank failures of the 1960's and 1930's.

  • The Fed decided they could not allow Bear Stearns to go through even a managed, orderly failure because it would have set off a major chain reaction of counter-party risk failures that would have decimated Wall Street.

  • The deceit and fraud will continue until stopped by an external regulatory force not controlled by special interests.

    Bear Stearns Bailed Out by Fed, J.P.Morgan
    Friday March 14, 11:34 am ET
    By Stephen Bernard, AP Business Writer
    Teetering Bear Stearns Gets Bailout From Federal Reserve, J.P.Morgan Chase

    NEW YORK (AP) -- Bear Stearns Cos., one of Wall Street's venerable investment banks, received a bailout Friday by the federal government and JPMorgan Chase & Co. in a surprise, last-ditch effort to save the 86-year old institution.

    The Federal Reserve responded swiftly to pleas from Bear Stearns that its coffers had "significantly deteriorated" within a 24-hour period. Central bankers backed an arrangement to bolster the company, and stood ready to provide extra resources to combat a credit crisis that now threatens one of America's biggest financial institutions.

    Bear Stearns, the nation's fifth-largest investment bank, made its fortune dealing in opaque mortgage-backed securities -- a strategy that might be its undoing amid the worst housing slump in a quarter century. The bank has racked up $2.75 billion in write-downs since last year, and faced a possible collapse without some kind of lifeline.

    Bear Stearns lost half of its value within 30 minutes of the market open, before clawing back a bit to be down 41 percent, or $23.51, at $33.49 by midday. The news rattled investors, pushing the Dow Jones industrial average down about 150 points.

    JPMorgan Chase, the nation's third-largest bank, agreed to pump more money into Bear Stearns to keep it in business, but did not divulge how much it was spending. Top executives from both companies were in talks, and were even considering the outright sale of Bear Stearns to JPMorgan, according to a person familiar with the talks who was not authorized to speak on the record.

    Bear Stearns said in a statement that it is working with JPMorgan Chase to find permanent strategic alternatives to alleviate their cash problems.

    JPMorgan Chase -- which has been hurt far less by the mortgage morass than other investment banks -- is providing secured funding to Bear Stearns for 28 days, backstopped by the Federal Reserve Bank of New York. Bear Stearns and the Fed approached JPMorgan Chase about the financing and a potential deal, according to the person familiar with the talks.

    Rumors have persisted throughout the week that Bear Stearns was facing major cash flow problems, but the investment bank's chief executive initially denied those rumors.

    "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity," the bank's president and chief executive, Alan Schwartz, said in a statement Friday. "Amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated."

    In a memo sent to employees, Schwartz said the temporary financing would allow the company to "get back to business as usual."

    The company has struggled since the middle of last year because of the fallout in the mortgage and credit markets. Last summer, two hedge funds worth billions of dollars managed by Bear Stearns collapsed because of bad bets on securities backed by subprime mortgages -- loans given to customers with poor credit history.

    JPMorgan Chase said the financing would not expose its company to any material risk, though its shares dropped 1.4 percent, or 53 cents to $37.58.

    AP Business Writers Madlen Read and Joe Bel Bruno in New York and Martin Crutsinger in Washington contributed to this report.

    JPMorgan Chase and Federal Reserve Bank of New York To Provide Financing To Bear Stearns

    NEW YORK -- (Business Wire) --

    Today, JPMorgan Chase & Co. (NYSE: JPM) announced 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.

    JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $1.6 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and government clients under its JPMorgan and Chase brands. Information about the
    firm is available at http://www.jpmorganchase.com/. Contacts: JPMorgan Chase & Co.
    Investors: Julia Bates, 212-270-7318 or Media: Kristin Lemkau, 212-270-7454