The global credit crunch claimed its biggest victim yet on Friday when the United States Federal Reserve orchestrated an emergency bail-out for Bear Stearns after a cash crisis prompted a run on the US’s fifth-biggest investment bank.
In a move that eclipsed the enforced rescue of Northern Rock six months ago, the 85-year-old Wall Street institution admitted it was looking for a buyer after being thrown a temporary lifeline by rival bank JP Morgan Chase guaranteed by the US central bank.
President George Bush sought to calm fears of a deep recession in the world’s biggest economy when he said that despite the current ”tough times”, the US economy remained fundamentally sound.
But the president’s words did nothing to dampen speculation on Wall Street that other blue-chip investment banks may also be facing a cash crisis as a result of their exposure to the collapsing US real-estate market.
The ratings agency Standard & Poor’s responded to the rescue announcement by cutting Bear Stearns’s credit rating to BBB — the second-lowest investment grade — putting more pressure on its beleaguered stock.
Speculation about Bear had mounted for days. By Thursday, worried institutional clients were withdrawing large sums of money. That evening, the Fed’s governors unanimously voted to come to the bank’s aid by guaranteeing a 28-day loan provided by JP Morgan Chase.
”Bear Stearns has been subjected to a significant amount of rumour and speculation over the past week,” said Bear’s chief executive, Alan Schwartz. ”Concern on the part of counter-parties, on the part of customers and lenders, got to the point where a lot of people wanted to get their cash out.”
Within minutes of the announcement, Bear Stearns’s shares halved in value and other banks followed it downwards. Lehman Brothers’s stock slumped by 11% on uncertainty about its credit exposure, while Citigroup, Goldman Sachs and Bank of America all slipped by more than 3%.
Among the biggest losers from Bear’s crisis is the British-born billionaire owner of Tottenham Hotspur, Joe Lewis, who bought almost 10% of the bank at the end of last year and has seen the value of his shares dive by more than $750-million.
Analysts said the call for help from the Fed amounted to an act of desperation. Carl Lantz, at Credit Suisse, said it meant the bank ”didn’t have enough money to turn the lights on this morning”.
Markets
In the markets, the dollar hit fresh lows against the euro and the Swiss franc, and traded below 100 against the yen. Gold again became a haven for investors.
On Wall Street, the Dow Jones industrial average was down more than 307 points by early afternoon. London’s FTSE 100 index closed down 60 points at 5 631,7.
Bear’s difficulties arise from its positioning as a specialist in packaging credit instruments such as mortgage-backed securities. Such reliance left it with far more exposure than its rivals to last year’s collapse in the US property market.
Although the Fed is under no obligation to help, its governors are mindful of the potential knock-on effect if a large institution goes bankrupt — billions of dollars’ worth of complex credit swaps link the investment banks. Furthermore, Bear is a leader in providing clearing services to hedge funds, and these clients could find themselves temporarily unable to trade if Bear shut down.
”If it did go into receivership, hedge funds would find themselves in a terrible jam,” said Samuel Hayes at Harvard University. ”They would probably find they couldn’t trade securities in the way they usually do.”
The bank’s veteran boss, Jimmy Cayne, stepped back from day-to-day control in January after persistent criticism of his tenure, including allegations he was playing bridge or golf when difficulties mounted last summer.
Bear said it was open to ”any strategic alternatives” that would protect its clients and provide shareholder value — a statement widely interpreted as a cry for a white-knight bidder to take it over.
Possible purchasers include JP Morgan, which said it was working closely with Bear on securing permanent financing or ”other alternatives for the company”. — guardian.co.uk Â