JPMorgan Chase, Fed to aid Bear Stearns
NEW YORK - The Federal Reserve said Friday that it has voted to endorse an arrangement to bolster troubled Bear Stearns Cos. and stands ready to provide extra resources to combat a serious credit crisis.
The Fed announcement came in a brief two-sentence statement that was issued as stocks were plunging on Wall Street over worries that a plan to ease a liquidity crisis at Bear Stearns Cos. might not work.
“The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system,” the board said.
The statement said that the board had voted unanimously to approve the arrangment announced by JP Morgan Chase and Bear Stearns earlier on Friday.
The plan will provide secured funding to Bear Stearns for an initial period of 28 days, seeking to provide short-term relief for Bear Stearns.
Treasury Secretary Henry Paulson praised the Fed’s leadership and said that the country’s financial system would be able to weather the problems.
“As we have been saying for some time, there are challenges in our financial markets and we continue to address them,” Paulson said in a statement. “This is another challenge that market participants and regulators are addressing. We are working closely with the Federal Reserve” and the Securities and Exchange Commission, he said.
Paulson also said that he appreciated the leadership of the Fed “in enhancing the stability and orderliness of our markets.”
While it was not clear exactly how much money Chase would pump into Bear, a person familiar with the bailout, who spoke on condition of anonymity because the talks are private, said Chase may end up buying Bear Stearns outright.
Bear Stearns said in a statement it is working with JPMorgan Chase to find permanent strategic alternatives to alleviate the liquidity problems, but could not guarantee they would be successful.
JPMorgan Chase is providing secured funding to Bear for 28 days, backstopped by the Federal Reserve Bank of New York. Bear Stearns and the Federal Reserve approached JPMorgan Chase about the financing and a potential deal, according to the source.
Rumors have persisted throughout the week that Bear Stearns was facing major liquidity problems, but the investment bank’s chief executive initially denied those rumors.
“Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,” Bear Stearns president and chief executive, Alan Schwartz, said in a statement. “Amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.”
In a memo sent to employees, Schwartz said the temporary financing would allow the company to “get back to business as usual.”
The company has struggled since the middle of 2007 due to the fallout in the mortgage and credit markets. Last summer, two hedge funds worth billions of dollars managed by Bear Stearns collapsed because of bad bets on securities backed by subprime mortgages — loans given to customers with poor credit history.
JPMorgan Chase said the financing would not expose its company to any material risk.
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