Bear Stearns has reached out to rival JP Morgan Chase and the Federal Reserve Bank of New York for emergency funding to reassure investors concerned about the struggling investment bank's deteriorating liquidity. JP Morgan and the Fed agreed to provide short term secured funding for up to 28 days, with JP Morgan Chase saying it was working to find permanent or other alternative funding.
Bear Stearns finds itself in this mess simply because lenders and investors want their cash back, and without this financing deal it cannot make the payments.There are already rumors in the market that it is up for sale.
Bear Stearns was one of the biggest buyers and packagers of mortgage backed securities.Since business was booming they did not bother to diversify.As a result the credit crunch has hit the company particularly hard.Recently Moody downgraded the mortgage debt held by Bear Stearns which led to speculation that it was facing liquidity problems.This is what is behind the belief that with its restricted business model and high exposure to mortgage related instruments, it is in serious trouble.
Tuesday's Fed move to make available$200 billion to financial institutions against illiquid assets, such as mortgage backed securities, as collateral should have helped Bear Stearns, but it doesn't seem so. It's shares lost 50% of their value today, shortly after trading started.It's CEO Alan Schwartz however insists 'There is absolutely no truth to the rumors of liquidity problems.' He added that Bear's 'balance sheet, liquidity, and capital remain strong,' and that the company's first quarter earnings, to be announced March 20th, will fall within analyst's range of forecasts. The CEO may paint a rosy picture but the market is clearly saying that Bear Stearns is doomed.