Sunday, March 16, 2008

Bear Stearns: the banking twister heading your way

David Smith and Dominic Rushe in New York
From The Sunday TimesMarch 16, 2008

The credit crunch claimed its first big victim on Wall Street when the Bear Stearns investment bank was put on life support – and there could be worse to come

The rumours had been swirling around for days. Early last week America’s Federal Reserve led other central banks by announcing the injection of $280 billion (£138 billion) into the markets to help ailing banks.

Was the Fed acting out of general concern for the economy and credit markets, or was it trying to save one or more troubled financial institutions?

On Friday the answer came. While the Fed’s move was aimed at easing strains in the markets, Wall Street’s instincts were right. One of its brethren, Bear Stearns, for more than 80 years one of the street’s blue-blooded names, was in deep trouble.

In a dramatic move, JP Morgan Chase and the Federal Reserve Bank of New York stepped in with emergency funds to keep the beleaguered Bear afloat using a legal provision brought in during the great depression era. While Northern Rock was the victim of a run by retail customers, Bear Stearns’s money drained away when bankers and big-time investors made so many withdrawals that it could no longer meet its obligations.


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