A year ago, Bear Stearns — up until fairly recently a leading investment, securities and brokerage firm — saw its stock trading for $170 a share. By the end of the calendar year, it was about $88 a share. As recently as four days ago, it was $57 a share. Yesterday, the entire company, in total collapse, sold for $2 a share.
This isn’t exactly a political story, but when a bear roars, it’s hard not to take note. Put it this way: Bear Stearns sold at a value of just $236 million — and its Manhattan building is believed to be worth more than that.
Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion credit line to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.
In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.
The moves amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation’s financial markets from what officials feared could be a chain reaction of defaults.
After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.
In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.
The Fed, working closely with bank regulators and the Treasury Department, raced to complete the deal Sunday night in order to prevent investors from panicking on Monday about the ability of Bear Stearns to make good on billions of dollars in trading commitments.
Reading this story in the NYT this morning, the following words jumped out at me: “systemic meltdown,” “unprecedented,” “near collapse,” and “panicking.”
Yes, the Fed is scrambling, but this paragraph from a Reuters report also caught my eye: “‘The market is totally panicking,’ said a trader at big Japanese bank. ‘The fact that the Fed had to announce its emergency steps on Sunday night highlighted the seriousness of the situation.'”
The LAT added:
For Bear Stearns, a major force in sub-prime mortgage lending, the speed and ferocity of the fall underscored the depth of a crisis that threatens the financial system.
“It’s amazing that a firm with a storied history that has been respected for all these years has within two weeks literally gone from solvent to insolvent,” said Larry Tabb, head of a financial markets consulting firm in Westborough, Mass. “It’s scary and it’s horrible.”
And the next question — one of them, anyway — is whether Bear Stearns’ collapse will spread.
The cash squeeze that brought Bear Stearns to its knees is fanning fears that other investment banks might be vulnerable to the crisis of confidence gripping Wall Street.
Investors are bracing for another volatile week in the markets as bankers and policy makers deal with the fallout from their bid to rescue Bear Stearns.
For now, the prospect of a new wave of consolidation in the beleaguered financial services industry seems remote. That is because would-be acquirers and everyday investors alike have lost faith in the values that Wall Street firms are placing on their own assets.
Of particular concern are the so-called marks placed on mortgage-linked investments like those that undid Bear Stearns, prompting a run on the firm that led the Federal Reserve and JPMorgan Chase to throw Bear Stearns a financial lifeline last week.
This going to be very unpleasant.
