Fed bails out Bear Stearns

The Federal Reserve Bank of New York has stepped in to prevent insolvency at Bear Stearns, offering to provide liquidity through JP Morgan.

JP Morgan said it would provide "secured funding to Bear Stearns as necessary for an initial period of 28 days". The funding would be matched back-to-back by discount window loans from the Fed, which are not directly available to investment banks.

The loans are likely to come from the Fed's secondary credit facility, which carries an interest rate of 4% – 100 basis points above the target fund rate.

In the longer term, Bear Stearns will also have access to Fed funding through the increased $100 billion liquidity injection on March 24, announced earlier this week. It added that it was "talking with JP Morgan Chase & Co regarding permanent financing or other alternatives”.

Chief executive Alan Schwartz blamed "market rumours" for the loss of liquidity, adding: "Nevertheless, amidst this market chatter, our liquidity position in the past 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the market-place, strengthen our liquidity and allow us to continue normal operations."

On Monday, Schwartz told the markets: "Bear Stearns' balance sheet, liquidity and capital remain strong." There was no truth to the rumours of liquidity problems, the bank said.

Schwartz took over as chief executive when previous head Jimmy Cayne resigned in January this year. Bear Stearns has suffered badly from the collapse in subprime mortgages, taking $1.9 billion in quarterly write-downs in December.

See also: Central banks act again to preserve liquidity
Bank practices undermined liquidity, says BIS
Cayne bows out of Bear Stearns