Thread: Bear Stearns to Get Backing From J.P. Morgan, N.Y. Fed

Bear Stearns to Get Backing From J.P. Morgan, N.Y. Fed

Firm's Shares Sink Amid Liquidity Fears
By KEVIN KINGSBURY, ANDREW DOWELL and SERENA NG
March 14, 2008 2:15 p.m.

NEW YORK -- In a dramatic move Friday, J.P. Morgan Chase & Co. and the Federal Reserve Bank of New York stepped in with emergency funds to keep beleaguered investment bank Bear Stearns Cos. afloat.

The move, during a week of worry about whether Bear could continue to meet its obligations, took the credit crisis to a new, more serious stage and was a reminder of how quickly an erosion of confidence can undermine even leading financial institutions.

The involvement of the Fed -- coordinating with the Treasury Department and the Securities and Exchange Commission -- made clear authorities were concerned about the risks to the broader financial system. Bear is the smallest of Wall Street's big five investment banks, but it is a significant player in markets for debt, particularly for securities backed by mortgages.

Bear Stearns's problems built this week, as counterparties in the market grew extra cautious about entering deals with the bank. Bear's executives tried all week to reassure markets that its financial position was solid. But in a week that also saw the collapse of the $22 billion, mortgage-focused hedge fund
Carlyle Capital, those reassurances went unheard, and Bear ultimately was forced to seek help.

"We have tried to confront and dispel these rumors and parse fact from fiction," CEO Alan Schwartz said in a release. "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."

Friday afternoon, Standard & Poor's cut its long-term credit rating on Bear Stearns by three notches to BBB and said further downgrades are likely, noting the company's liquidity squeeze.

S&P said, "Bear has been experiencing significant stress in the past week because of concerns regarding its liquidity position. Although the firm's liquidity, at the beginning of the week, held steady with excess cash of $18 billion, ongoing pressure and anxiety in the markets resulted in significant cash outflows toward the week's end, leaving Bear with a significantly deteriorated liquidity position at end of business on Thursday."

S&P said it current ratings "are based on our expectation that Bear will find an orderly solution to its funding problems. However, although we view the liquidity support to Bear as positive, we consider it a short-term solution to a longer term issue that does not entirely affect Bear's confidence crisis. We also remain concerned about Bear's ability to generate sustainable revenues in an ongoing volatile market environment."

Officials at Moody's Investors Service have also been meeting Friday to discuss whether developments at Bear Stearns require a ratings downgrade. Currently, Moody's, a unit of Moody's Corp., rates Bear debt A2, five notches above junk level and five notches below the top triple-A level.

Fed Steps In

Specifically, J.P. Morgan will borrow funds from the Fed's discount window and relend them to Bear Stearns for 28 days. The borrowings from the Fed will be secured by collateral furnished by Bear Stearns, and the Fed, not J.P. Morgan, is bearing the risk of losses if that collateral falls in value. The size isn't predetermined, but is limited by the available collateral.

The arrangement employs a little-used Depression-era provision of the Federal Reserve Act. New York-based J.P. Morgan, unlike investment banks like Bear, has the advantage of being able to borrow directly from the discount window and, with just over $3 billion in write-downs thus far, has weathered the credit crisis far better than commercial banking peers like Citigroup Inc.

The timing of the move made its urgency clear: If Bear could have held out until March 27, it could have borrowed directly from the Fed itself under a new program announced just Tuesday.

The developments could mean the end of independence for Bear, founded in 1923. J.P. Morgan said it is "working closely with Bear Stearns on securing permanent financing or other alternatives for the company" -- Wall Street lingo for a sale or other strategic-level change -- and CNBC reported that the bank is "actively being shopped" to potential buyers.

The cost of protecting investments in Bear Stearns debt against default jumped sharply, indicating growing concerns about Bear's creditworthiness. Similar protection for other financial companies also rose in value, a sign of rising worry in the markets.

Bear's shares plunged, dropping by more than half at the day's low. Shares recently were trading nearly 41% lower at $33.90, knocking about $3.3 billion in market value off the stock. The options market signaled a dim outlook, with contracts giving the right to sell Bear Stearns stock for $25 soaring in value.

The shares have fallen by two-thirds in the past three months. The news also unnerved the broader markets, which just yesterday were cheering a report from Standard & Poor's that suggested the end might be in sight for write-downs related to subprime mortgages.

The intervention by J.P. Morgan and the New York Fed shows Bear "didn't have enough money to turn the lights on this morning," said Carl Lantz, strategist at Credit Suisse. "And in a big picture sense, this isn't that comforting."

U.S. Treasurys surged, as investors sought a safe place for their money, and the dollar fell. "It's just pure fear across the board right now," said Geoffrey Yu of UBS. "All the promising news this past week has been undone over this Bear Stearns news....I don't think the market has seen anything of this magnitude before, such a big bank."

Lehman Parallels

Analysts and investors say Bear's predicament has parallels to what Lehman Brothers went through during the late 1990s.

During the credit crunch of 1998, which was sparked off by the Russian debt crisis and the implosion of hedge fund Long-Term Capital Management, Lehman was the subject of rampant market speculation that it might face financial difficulties, because it held emerging market bonds and other assets that were falling in value. As Lehman's shares and bonds dived on the rumors, the Wall Street firm, which at the time depended heavily on short-term funding, ran into problems obtaining such financing. It fought its way out of the trap without having to turn to the Fed, however.

"The nature of financial companies is that they are pretty much a black box," says Jeff Houston, a bond fund manager at American Century Investments in San Francisco. "If people start to worry about what's in the box, there's not much the firms can do to demonstrate that they are not as weak as they appear to be."

At the end of November, Bear had short-term borrowings of $24 billion, of which $11.6 billion was unsecured and $12.4 billion was secured. It also had $68.5 billion in long-term borrowings and $21.4 billion in cash or equivalents, according to regulatory filings.

--Greg Ip, Aaron Lucchetti, Kate Haywood, Riva Froymovich and Robert Curran contributed to this article

Write to Kevin Kingsbury at kevin.kingsbury@dowjones.com, Andrew Dowell at andrew.dowell@dowjones.com and Serena Ng at serena.ng@wsj.com

http://online.wsj.com/article/SB1205501 ... side_today

I have been listening to this on the financial networks today. What's next?

Ephesians 4:32