Fed, rival keep Bear Stearns breathing

JPMorgan reportedly may buy faltering investment bank

Bear Stearns lost 53 percent of its market value, or nearly $5.7 billion, yesterday after it said it was on the brink of collapse. (Ramin Talaie/Bloomberg News)

NEW YORK - Bear Stearns Cos., teetering on the brink of collapse from a lack of cash, got emergency funding from the Federal Reserve and JPMorgan Chase & Co. in the largest government bailout of a US securities firm.

After denying earlier this week that access to capital was at risk, Bear Stearns chief executive Alan Schwartz said yesterday that the 85-year-old company's cash position had "significantly deteriorated" in the past 24 hours. The central bank agreed to provide financing through JPMorgan for up to 28 days, the bank said yesterday.

JPMorgan, led by chief executive Jamie Dimon, is considering buying Bear Stearns, among other options, according to three people briefed on the matter. No agreement has been reached, and it's possible that no deal will be completed, said the people, who declined be identified because the discussions are confidential.

The Fed acted to prevent the failure of the second-biggest underwriter of US mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week. JPMorgan, which has suffered fewer losses than rivals during the credit crisis, may end up owning all or part of Bear Stearns, analysts speculated.

"I don't think they can afford to let Bear go," said Charles Geisst, the author of "100 Years on Wall Street," referring to the New York Fed bailout. "At this particular moment in time, it would be a devastating blow to the markets."

Bear Stearns, founded in 1923, acted in response to "market rumors" of a liquidity crisis, Schwartz, 57, said in a separate statement. He said earlier this week that the company's "liquidity cushion" was sufficient to weather the credit-market contraction. Traders have been reluctant to engage in long-term transactions with Bear Stearns as the counterparty, The Wall Street Journal reported Thursday.

"We have tried to confront and dispel these rumors and parse fact from fiction," Schwartz said in the New York-based company's statement yesterday. "Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated."

The announcement caused financial shares to plunge, with Bear Stearns tumbling a record 47 percent to $30 in New York Stock Exchange composite trading. The stock has lost 66 percent of its value this year.

Lehman Brothers Holdings Inc., Citigroup Inc., and Bank of America Corp. also led declines as all 10 industry groups in the Standard & Poor's 500 Index fell. Lehman, the biggest underwriter of US mortgage bonds, said it obtained a $2 billion, three-year credit line from 40 banks.

Bear Stearns has retained investment bank Lazard Ltd. to seek "strategic alternatives," Schwartz said. Bear Stearns said it's also in talks with New York-based JPMorgan about long-term funding.

"The future for Bear will be found in a forced marriage," said Charles Peabody, an analyst at Portales Partners LLC in New York who rates the stock a "sell." "Their business model is broken. They don't have the ability to go it alone."