Bear Stearns gets bailout from Fed

March 14, 2008 4:22:40 PM PDT
A major U.S. bank is in serious financial trouble, and had to be bailed out by the Federal Reserve and J.P. Morgan. The Federal Reserve's help is critical right now. Bear Stearns is the second biggest underwriter of mortgage bonds and has been hit hard by home loan defaults. Bear Stearns is also America's fifth largest investment bank.

This deal guarantees at least another 28 days of operating money. Bear Stearns sheer size means its money troubles ripple through Wall Street, and can send your investments tumbling, even if you don't deal directly with the company. So that is why the Fed has stepped in - and in the words of one analyst, Bear Stearns is too big to let fail.

Bear Stearns cash position got much worse in the past 24 hours, based on in part on rumors sweeping Wall Street.

"Rumors of them running out of money, true or not, were enough to spark the counter parties and the people who do business with them to not do business. And so with everything dried up, they essentially did run out of money," said David Callaway, MarketWatch.

And that required an infusion of cash from competitor J.P. Morgan and the Federal Reserve Bank of New York -- the first time since 1999 that the Fed has jumped in to save a big Wall Street bank.

"It shows that first they consider Bear Stearns too big to fail. It's one of the big Wall Street investment banks that can't fail," said Callaway.

Bear Stearns lost billions in bad sub-prime mortgages last year, and faced the possibility of more losses this year. President Bush didn't specifically talk about Bear Stearns this morning, but in a speech to the Economic Club of New York, he denied the country was in recession.

"I believe that we are a resilient economy. And, I believe that the ingenuity and resolve of the American people is what helps us deal with these issues. And, it's going to happen again," said President Bush.

"It's clear that Bear Stearns days are numbered now. Probably more likely that J.P. Morgan will end up owning them at the end of the day," said Callaway.

Bear Stearns' stock dropped more than 40 percent today on word of its money troubles. This isn't the first time this sort of bailout has been tried. In 1999, the Fed and several Wall Street brokerages teamed up to bailout the hedge fund Long Term Capital Mortgage, again fearing it's troubles could spread to the broader market. Ironically, Bear Stearns refused to contribute to the bailout. Long Term Capital folded a year later.


Load Comments