Stocks Tumble On Plan To Aid Bear Stearns

(CBS/AP)  Stocks have suffered another big drop Friday after The Federal Reserve invoked a rarely used Depression-era procedure to bolster troubled Bear Stearns Cos., touching off concerns about the severity of the credit market's overall troubles.

Friday's plan by the New York Federal Reserve and JP Morgan Chase & Co. offers Bear Stearns relief from a sudden liquidity crunch that analysts surmised could have felled the investment bank. But the company's position on the precipice of financial disaster has left many investors shaken and spoils some hopes that the moribund credit market is on the mend.

The Dow Jones industrial average has closed down about 194 points at the 11,951 level.

The action won praise from the administration, with President Bush saying that Fed Chairman Ben Bernanke was "doing a good job under tough circumstances."

Bernanke, delivering a speech later Friday, told a housing group he had had a "busy morning." He did not elaborate on the Fed's action regarding Bear Stearns.

"The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system," the board said in its statement. It said members had voted unanimously to approve the arrangement, announced by JP Morgan Chase and Bear Stearns earlier.

Delivering a speech on the economy in New York, Bush voiced confidence in the Fed's actions to aggressively cut interest rates and the Fed announcement last week that it would supply up to $200 billion in loans to cash-strapped financial institutions.

"It was a strong action by the Fed and they did so because some financial institutions that borrowed money to buy securities in the housing industry must now repair their balance sheets before they can make further loans," Bush said. "Today's actions are fast moving, but the chairman of the Federal Reserve and the secretary of the treasury are on top of them and will take the appropriate steps to promote stability in our markets."

The investment bank, set to report earnings next Wednesday, was the largest underwriter of global mortgage-backed securities in 2007 and second only to Lehman Brothers in U.S. mortgage-backed securities, reports the Wall Street Journal.

CBS News anchor Katie Couric reports that there had been whispers of trouble at Bear Stearns - Wall Street's 5th biggest investment bank - for weeks. By Friday's opening bell, it was a full blown alarm: the 85-year-old investment bank was on the brink of a liquidity crisis.

"The danger of Bear Stearns having a liquidity crisis," Morningstar's Ryan Lentell told CBS News, "is that they could quickly be out of business."

Bear Stearns is heavily invested in complex financial instruments tied to risky subprime mortgages. As fears grew that the value of theseinvestments could plummet, other firms stopped pumping new money into Bear Stearns - or they cashed out.

The plan announced Friday will supply secured funding to Bear Stearns for an initial period of 28 days, seeking to provide short-term relief for the investment bank.

Senior Federal Reserve staffers said the arrangement allows JPMorgan Chase and Co. to borrow from the Fed's discount window and put up collateral from Bear Stearns to back up the loans.

"If they hadn't," said Harvard Business School professor Samuel Hayes, "this would have been a domino which would have probably caused other firms to go under as well."

JP Morgan, a bank, has access to the discount window to obtain direct loans from the Fed, but Bear Stearns, an investment house, does not.

This type of procedure, Fed officials said, dates back to the Great Depression of the 1930s but has rarely been used since that time.

In his speech, Bush said the administration had a plan to deal with the problems in credit and housing markets and said he opposed a number of measures pending in Congress to go further by allocating billions of dollars to purchase abandoned and foreclosed home and changing the bankruptcy code to allow judges to adjust mortgage terms.

However, Senate Banking Committee Chairman Christopher Dodd, D-Conn., said the problems at Bearn Stearns, one of the country's largest investment banks, highlighed the need for more aggressive efforts.

"Instead of cheerleading and reacting with tepid measures, the administration should act boldly and decisively to prevent the looming foreclosure crisis from having catastrophic consequences for our economy and our markets," Dodd said in a statement.

Treasury Secretary Henry Paulson praised the Fed's leadership and said that the country's financial system would be able to weather the problems.

"As we have been saying for some time, there are challenges in our financial markets and we continue to address them," Paulson said in a statement. "This is another challenge that market participants and regulators are addressing. We are working closely with the Federal Reserve" and the Securities and Exchange Commission.

Paulson said he appreciated the leadership of the Fed "in enhancing the stability and orderliness of our markets."

The action by the Fed board in Washington represented an endorsement of a rescue effort for Bear Stearns that had already been arranged by JPMorgan and the Federal Reserve's New York regional bank.

It was seen as a last-ditch effort to save the investment bank, which on Friday acknowledged its serious financial problems after a week of denials.

JPMorgan Chase is providing an undisclosed amount of secured funding to Bear for 28 days, backstopped by the Federal Reserve Bank of New York.

The Securities and Exchange Commission issued a statement saying it has been "in close contact" with Treasury, the Federal Reserve and the Federal Reserve Bank of New York during discussions concerning an agreement by J.P. Morgan Chase & Co. to provide a secured loan facility to The Bear Stearns Companies.

But Couric reports, the financial rescue did nothing to keep Bear Stearns stock from falling more than 40 percent today, with one stock analyst predicting it could soon be worthless.

"The difficulty in a relationship, even in a financial relationship, trust is very important," UBS Financial Services' Arthur Cashin told Couric. "And when trust is shaken, it takes a while to get it back."

[gkc99]

So an individual misses a credit card payment, and by "universal default" so beloved by the credit predators, all the interest rates shoot up to 35%, guaranteeing the borrower will never be able to pay.

Response of Repugniscum Bushits: "Too bad".

An individual is sucker punched into a mortgage with monthly payments escalating like a Scud missile at launch.

Response of Repugniscum Bushits" "Tough *******".

A huge Wall Street investment firm makes really stupid, bad loans so some fatcat executives can get $100 million bonuses, then falls on its face due to its own mismanagement.

Response of REpugniscum Bushits: "Oh you poor dears, we''re sorry you got hurt, here let us send you billions of other peoples dollars so you can keep on living the fatcat lifestyle and donating to the RNC Bushits! How much do you need, little darlings?"

Might be time to dump the Repugniscum Bushits!

[gkc99]

Sure is funny how the Neoconscum and the Bushits love to pimp for those welfare hos at B.S.

Another example of Repugniscum Welfare for the Wealthy.

Gotta bail out Bushit''s Billionaires. Dik Cheney might have an investment in B.S.

[Latrocinor]

We can complicate the truth and try to lie about the cause, but much of Wall Street is in similar shoes; investment banks are over-leveraged and into very risky bets. And when people lose confidence and want their $ it''''s going to look a lot like 1929!

Posted by gce65 at 11:44 PM : Mar 15, 2008
-----------------------------
Bear gets bought out at a bargain price and stays in business and the people wonder what happened?

[payasyougo]

What we need is a system where people are qualified to buy what they can afford. That qualification should include some savings for a down payment and a debt to cash flow ratio that will not strap the buyer. This would be a system where you don''t get what you want now and have someone else pay for it later.

[tomtomasters]

They need to enact The 2 loan Mortgage policy to separate housing from the work place economy. The work place economy is too volatile to expect a home mortgage banking system to remain stable and secure. When people get loans for a home they get 2 loans. One loan pays for the house; the other loan is used to make payments on the 1st loan and itself, until the money runs out. By that time credit history is established to be able to take out another loan to replace the 2nd used to continue making payments. This process goes on until the house the paid, leaving a secure housing market. The 2nd loan that still has payments left but is a smaller principal is paid via the same process until the loans are paid. It will work because people can then deduct the interest from their taxes each year, not on one loan but from two, providing more liquidity to them to make payments on time.

[tomtomasters]

It is the same principal as borrowing from Peter to pay Paul. The rules of equity holding changes more toward Credit Value Worthiness and Credit Appreciation, meaning homeowners stable pay back earns them the ability to secure higher value loans or increases their Credit Appreciation. Banks are in the Business for loans and having stable paybacks. Equities provide no such leverage, because often equities are false from speculative appraisals. They could be worth more or really less, since age devalues property. Bernake and Paulson need to learn that Banking is about Credit Worthiness and when earned it increases Bank Credit Appreciation. This is what makes Bank more valuable to the people who use the banks instead of the false equities banks think they own. Clearly they are losing in the present scheme, and is the clue that Equity holdings is a false indicator to Bank Stability and Bank worth Appropriations. Get on the stick Bernie and Paul, and Setup the 2 Loan Mortgage Policy Act to secure banks and insure them-selves from the unstable work place environment. If not they become worthless Institutes with incompetent Banking Practices and Policies.

[tomtomasters]

It is the same principal as borrowing from Peter to pay Paul. The rules of equity holding changes more toward Credit Value Worthiness and Credit Appreciation, meaning homeowners stable pay back earns them the ability to secure higher value loans or increases their Credit Appreciation. Banks are in the Business for loans and having stable paybacks. Equities provide no such leverage, because often equities are false from speculative appraisals. They could be worth more or really less, since age devalues property. Bernanke and Paulson need to learn that Banking is about Credit Worthiness and when earned it increases Bank Credit Appreciation. This is what makes Bank more valuable to the people who use the banks instead of the false equities banks think they own. Clearly they are losing in the present scheme, and is the clue that Equity holdings is a false indicator to Bank Stability and Bank Worth Appropriations. Get on the stick Bernie and Paul, and Setup The 2 Loan Mortgage Policy Act to secure banks and insure themselves from the unstable work place environment. If not..they become worthless Institutes with incompetant Banking Practices and Policies.

[tomtomasters]

They need to enact The 2 loan Mortgage policy to separate housing from the work place econony. The work place economy is too volatile to expect a home mortgage banking system to remain stable and secure. When people get loans for a home they get 2 loans. One loan pays for the house, the other loan is used to make payments on the 1st loan and itself, until the money runs out. By that time credit history is established to be be able to take out another loan to replace the 2nd used to to continue making payments. This processs goes on until the house the paid, leaving a secure housing market. The 2nd loan that still has payments left but is a smaller principal is paid via the same process until the loans are paid. It will work because people can then deduct the interest from their taxes each year, not on one loan but from two, providing more liquidity to them to make payments on time.

[toxictom1]

hmmm george the 1st has the s&l bailout that cost
us billions now george the 2nd has the sub-prime
fiasco does anyone out there see a trend or does
anyone really care anymore. the dollar is worth nothing
gas is going to 4 bucks a gallon people are losing there homes by the millions and bear sterns gets a bailout what a country if you are one of the good ol boys the deck is stacked and you can''t lose except
if you are middle class then you get %$#!!@#$

[gce65]

Obama and his pastor have nothing to do with this comments section.

This is about Bear Stearns and Wall Street greed.

Repeat after me: NINETEEN-TWENTY-NINE.