MercoPress. South Atlantic News Agency

Fed bails out leading Wall Street bank: who's next?

One of the United States leading investment banks, Bear Stearns received on Friday emergency funding, in a move that raises fears that one of Wall Street's biggest names is on the verge of collapsing.

JP Morgan Chase will provide the money to Bear Stearns for 28 days with the Federal Reserve of New York's backing. JP Morgan is also trying to get long-term financing for Bear Stearns. Bear Stearns' problems stem from the global credit crunch and the worry is that other lenders may also have major funding problems, analysts said. Bear Stearns is Wall Street's fifth largest investment bank, and has been at the centre of the US mortgage debt crisis. Recently, speculation had intensified that it was struggling to fund its daily business. BBC business editor Robert Peston said Bear Stearns had been taken to the brink of insolvency over the past 24 hours by a sudden collapse in confidence on the part of its hedge fund clients. As a result, these funds rushed to withdraw their assets. "The rescue of Bear Stearns demonstrates that the worst of the global credit crunch is not yet behind us" he said. Peston added that if Bear Stearns had been allowed to collapse, it could have put the whole financial system at risk. Bear Stearns shares dropped as much as 53% on the news before finishing Friday trading down 46%. The credit crunch was caused because banks became less willing to lend to each other after they suffered large losses on investments linked to the US housing market, and the sub-prime sector in particular. Sub-prime lenders focus on clients with poor or non-existent credit histories, and a record number of borrowers have defaulted on loans. The subsequent freezing-up of the credit markets created problems for a number of companies which relied on borrowing money to fund their business. At the end of last year, Bear Stearns reported that it had made its first ever quarterly loss after buying investments linked to the US mortgage market. It was one of the first to admit it had problems linked to sub-prime mortgages, after two of its hedge funds had to be bailed out. However analysts cautioned that Bear Stearns may not be the only bank suffering in the US financial system. "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 of Dresdner Kleinwort. "It raises severe concerns over other banks." Alan Schwartz, president and chief executive officer of Bear Stearns, said: "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. "We have tried to confront and dispel these rumors and parse fact from fiction. Amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated," he added. "We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations." BBC business editor Robert Peston said that the move by JP Morgan and the Fed of New York was essentially a central bank bailout. "In just the last 24 hours Bear Stearns came close to running out of the cash or liquidity it needs to meet its daily requirements" he said. "So enter the US Federal Reserve. It is promising to supply whatever liquidity is required by JP Morgan Chase, the leading bank, to help Morgan provide whatever funds are required by Bear Stearns". "Since JP Morgan is saying there is no risk to its shareholders, this represents a central bank bailout of Bear Stearns. The list of the main sub-prime losses so far: Citigroup, 18 billion US dollars; Merrill Lynch, 14.1 billion; UBS, 13.5 billion; Morgan Stanley, 9.4 billion; HSBC, 3.4 billion; Bear Sterns, 3.2 billion; Deutsch Bank, 3.2 b; Deutsche Bank: $3.2bn; Bank of America: 3 b.; Barclays, 2.6 b.; Royal Bank of Scotland: 2.6 b; Freddie Mac: 2 b; JP Morgan Chase: 3.2 b; Credit Suisse: 1 b; Wachovia: 1.1 b.; IKB: 2.6 billion and Paribas, 197 million US dollars.