March 15, 2008 in Economy, Politics

America’s Northern Rock

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To say we live in interesting times is an understatement. Yet another national bank — this time the Federal Reserve Bank of New York — comes to the rescue of the 5th largest investment bank in the United States, Bear Sterns. To be exact, funds are being loaned to JPMorgan Chase who will then lend this undisclosed sum of money to Bear Stearns to help the company stay in business. However, should the company default or worse yet go out of business, all the risk rest solely with the Fed. Basically, JPMorgan Chase is simply acting as a conduit for the transaction. Thus the American public should be pleased that their hard earned tax dollars is being used to bailout rich investment bankers. Not!

Fed leads Bear Stearns rescue
By Francesco Guerrera and Ben White in New York, and Krishna Guha in Washington
Financial Times, Published: March 14 2008 14:05 | Last updated: March 14 2008 23:21
The credit crisis on Friday engulfed one of Wall Street’s most important investment banks as the Federal Reserve and JPMorgan Chase combined to provide emergency finance for 85-year-old Bear Stearns and prevent further upheaval in global markets.
The decision by the monetary authorities to throw a temporary lifeline to Bear followed a night of deliberations involving regulators, led by Timothy Geithner, president of the New York Fed, and came after Bear’s shares plunged and its access to overnight funding dramatically diminished. It is likely to pave the way for a sale or liquidation of the company in the coming weeks. However, people close to the situation said Bear was also talking to strategic investors about a capital injection.
The rescue marked the first time in four decades that the US central bank has agreed to provide emergency finance to any financial institution other than a traditional commercial bank.
Fed officials told the Financial Times that it acted because of the systemic risks involved in the potential sudden failure of the fifth-biggest US investment bank at a moment of extreme fragility in the markets.

Investors reacted by seeking the safety of gold and short-term US government debt. Stocks initially fell as much as 2.8 per cent before paring back their losses. The S&P 500 closed down 2.1 per cent at 1,288.15. Financial stocks were among the worst performers, with the S&P Investment Banks index down 5 per cent. In London, the FTSE 100 closed down 1.07 per cent at 5,681.7. Bear shares plunged as much as 53 per cent before ending 47.4 per cent lower at $30, meaning they have lost more than three-quarters of their value over the past year. Credit rating agencies downgraded Bear’s debt to the second-lowest investment grade, a move that could worsen its financial position.
Top 10 investors in Bear Stearns Rank Investor
1 Barron Hanley Mewhinny
2 Joseph Lewis
3 Morgan Stanley
4 James Cayne
5 Legg Mason Capital Management
6 Private Capital Management
7 Barclays Global Investors
8 State Street
9 Vanguard Group
10 Janus Capital Management
The crisis at Bear, which has brought forward the announcement of first-quarter results to Monday, left some of its largest shareholders with sizeable losses.
Joseph Lewis, a UK-born billionaire who had been building a large stake in Bear, is estimated to have lost about $1bn on his investment since the summer. Jimmy Cayne, Bear’s chairman and former chief executive, is believed to have shouldered paper losses of more than $800m.
Bear on Friday said its liquidity position had “significantly deteriorated” and that it would access the Fed’s emergency finance facility – known as the discount window – indirectly through an arrangement with JPMorgan. The Fed took on the credit risk involved in the loans, which are secured against collateral. As an investment bank, Bear does not have access to the window, which is only open to commercial banks, so JPMorgan will act as a go-between.
The move marks a dramatic extension of the Fed’s role of lender of last resort for the financial system but Fed officials stressed there was no policy to provide emergency liquidity to investment banks in general.
Alan Schwartz, Bear’s chief executive, said the investment bank had fallen victim of a crisis of confidence in which counterparties in its core fixed-income markets were no longer willing to provide financing given widespread rumours that Bear could fail. On Wednesday, Mr Schwartz had told CNBC that the bank’s balance sheet had “not weakened at all”. On Friday he said that demands for cash had accelerated on Thursday.
Mr Schwartz said Bear would continue to work with advisers at Lazard to pursue strategic transactions that would protect customers and counterparties and maximise shareholder value.
Alternatives include a sale of the bank as a whole or in parts. JPMorgan is viewed as a potential buyer of pieces of Bear including its prime brokerage and asset management businesses.
Additional reporting by Michael Mackenzie and Anuj Gangahar
Copyright The Financial Times Limited 2008

One Comment

  1. March 16, 2008 at 12:34 am

    Paul Legato

    This is getting pretty out of hand. It’s corporate welfare for the biggest and wealthiest of all. Profits are kept private, and losses are socialized. A bank blows up, and taxpayers bail them out.

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