Fed Pulls Out Depression Era Stops in an Effort to Save Bear Stearns

by Nancy Osborne, COO of ERATE

 

The hits just keep coming for the Fed as things continue to go from bad to worse as they are forced to utilize provisions not employed since the Great Depression in order to rescue beleaguered Bear Stearns from insolvency. The nation's fifth largest investment bank has been struggling on life support as a result of problems related to wide-spread losses incurred by mortgage-backed securities. Bear Stearns was amongst the first to disclose mortgage related problems in the summer of 2007 when several of its hedge funds collapsed; it has amassed up to $2.75 billion in write-downs to date. The situation snowballed as rumors of insolvency circulated and what amounted to a bank run on the investment banker occurred as nearly $6 billion (half the institution's value) was abruptly wiped out as customers, lenders and investors began to pull their accounts. Bear Stearns has nearly 14,000 employees globally. The Fed was then forced to act quickly, applying a depression era provision, by essentially using JPMorgan Chase as a conduit to lend funds to Bear Stearns for a 28 day period. The size of the loan was predicated on the amount of collateral that the besieged institution could put up but it is the Fed who will assume the default risk rather than JPMorgan Chase. However JPMorgan Chase is considered to have one of the healthier balance sheets on Wall Street today and as a result was seen as a good candidate to help in this situation. The loan's 28 day time frame is expected to allow sufficient time for a potential buyer of Bear Stearns to evaluate the extent of their mortgage related losses and come up with an acquisition proposal. Naturally JPMorgan Chase is tops on the list of potential suitors. Speculation grows about what may lie ahead in the coming weeks and what other financial land mines have yet to be unearthed.