Fed leads Bear Stearns rescue

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.

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