Bear Stearns collapse prevented by a bailout from JPMorgan and Fed March 14, 2008

 

Bear Stearns (BSC) is the fifth largest global investment bank and securities trading and brokerage firm in the world.  Today, it had to turn to its stronger rival JPMorgan for help to prevent what could possibly have been a monumental collapse.  On March 10, 2008, Bear Stearns had formally denied market rumors that it had developed cash liquidity problems.  Apparently, its liquidity has significantly deteriorated over the past day and the temporary funding from JPMorgan will help it continue to operate normally.

According to the AP:

Nearly half the value of Bear Stearns, or about $5.7 billion, was wiped out in a matter of minutes as investors felt the bailout signaled that the credit crisis has reached a more serious stage, and now threatens to undermine the broader financial system — and the U.S. economy.

The market speculation about liquidity problems lead investors, customers, and lenders to withdraw their business and credit lines.  As a result, Bear Stearns looked for help but since they are a non-depository institution, they are ineligible to borrow directly from the Fed.  JPMorgan was selected as the intermediary, and it will be receiving a loan from the Federal Reserve to provide secured funding to Bear Stearns for up to 28 days.

Schwartz confirmed, as many on Wall Street suspected, that Bear Stearns could now be up for sale. He told analysts during a conference call that the short-term funding “is a bridge to a more permanent solution.” Bear Stearns is working with investment bank Lazard Ltd. to explore its options.

Since last year, they have racked up $2.75 billion in write downs.  They have struggled since two hedge funds under their control imploded and lost billions after betting heavily on securities backed by subprime mortgages.

“They were the dominant firm for repackaging mortgages,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC. “That’s where all earnings came from. They had the least diversified earnings stream of all of Wall Street securities firms, and as a result, they’re paying the price today.”

The overall market today is down with financials being sold off by scared investors.

Sidenote:  They posted some jobs at my university last year, I was going to apply for a technology analyst position with them after graduation!!!  Phew!!!