Bear Stearns gets Fed funding as shares plummet : US Business

By Joseph Giannone and Dane Hamilton

NEW YORK (Reuters) - JPMorgan Chase & Co and the Federal Reserve Bank of New York on Friday agreed to provide emergency financing to Bear Stearns after the investment bank said its cash position had deteriorated sharply, sending its shares into freefall.

Stock of the fifth-largest U.S. investment bank dropped as much as 50 percent in morning trading after the news, the latest in the Fed's efforts to soothe financial markets in response to a widening credit crisis spurred by rising mortgage defaults.

"Our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations," said Bear Stearns Chief Executive Alan Schwartz, in a statement.

The share fall of Bear Stearns, which specializes in mortgage finance and trading, roiled other financial stocks. Bear Stearns was recently trading at $31.27, down $25.73, or 45 percent.

Shares of Lehman Brothers Holdings Inc, fell 7.7 percent to $42.41, Morgan Stanley fell 2.3 percent to $40.61, and Goldman Sachs Group Inc fell 2.5 percent to $161.39 by 10:30 a.m. in New York.

Just Thursday, Bear Stearns sought to soothe the market over the state of its liquidity. The bank said on Friday it sought to "confront and dispel these rumors," but didn't disclose the size of the financing that it arranged.

"The market chatter about liquidity risk actually resulted in a run on the bank against Bear Stearns," said Jane Caron, senior vice president and chief economist strategist at Dwight Asset Management in Burlington, Vermont. "Investors pulled their repo lines. So even if they weren't in a liquidity crisis before, the rumors became self-fulfilling."

Bear Stearns has more exposure to the U.S. bond markets than its competitors, and has a large mortgage-backed securities business. It was among the first to disclose the impact of the subprime mortgage market meltdown when two of its leveraged hedge funds collapsed last summer, losing $1.6 billion.

"With the market's reaction, I'd say stick a fork in them, they are done," said James Ellman, portfolio manager at Seacliff Capital, a San Francisco-based hedge fund. "The company clearly has to choose from a set of unpalatable choices: sell a large amount of equity, sell the company outright or sell assets and try to hold on and hope for the best."

Standard & Poor's said on Thursday that subprime mortgage-related write-downs are likely more than halfway done, but more write-downs in other areas--including prime mortgages--are still possible.

The Wall Street Journal reported on Thursday that some clients are increasingly reluctant to trade with Bear Stearns, and that hedge funds are moving assets away from the investment bank's prime brokerage.

"The situation is very much that Bear Stearns was very close to the edge and it was much worse than we all thought," said Michael Klawitter, currency strategist at Dresdner Kleinwort, Frankfurt.

"It raises severe concerns over other banks. (Bear Stearns) wasn't a small bank, it was the second largest underwriter of mortgages last year. For the situation to deteriorate in that way is not good news and it will add further to jitters," he added.

The Fed, through its discount window, will provide non-recourse, back-to-back financing to JPMorgan Chase, the commercial bank said. JPMorgan said it does not believe this transaction exposes its shareholders to any material risk.

JPMorgan Chase also said it is working with Bear Stearns on securing permanent financing or other alternatives for the company.

The U.S. Securities and Exchange Commission said it has been in close contact with the Department of the Treasury, the Federal Reserve and the Federal Reserve Bank of New York during the financing talks.

(Reporting by Joseph A. Giannone, Dane Hamilton, Dan Wilchins, editing by Dave Zimmerman)

(c) Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.