Bear Stearns has had to be rescued from collapse by the US central bank.

US investment bank Bear Stearns has had to be rescued from collapse by the US central bank.
But how serious is this development for the future of the banking system, and what does it say about the credit crunch?
How big is Bear Stearns?
Bear Stearns is one of the major US investment banks which have dominated Wall Street for generations.
Founded in 1923, it is one of the leading global banking firms that operates at the wholesale level, dealing with governments, companies and other financial institutions.
Its core business lines include buying and selling stocks, government and corporate bonds, investment banking, global clearing services, asset management, and private client services.
Before the crisis, it had a market capitalisation of $60bn and assets under management of $350bn, and a global workforce of 15,000.
Why is the bank in trouble?
Bear Stearns has been severely affected by the loss of confidence in credit markets.
The company had invested heavily in sub-prime mortgage instruments and other securities which are now seen as highly risky, and which have fallen sharply in value.
And it had less capital than its rivals, such as Citigroup and Merrill Lynch, who were also heavily exposed, to plug the gap.
Last summer, two of Bear Stearns' hedge funds had to be bailed out, partly precipitating the first stage of the global credit crunch.
Now other banks have become unwilling to lend short-term money to Bear Stearns to keep its operations going.
And that has meant that it no longer has enough cash on hand, known as liquidity, to fund its operations.
How dangerous is the situation?
The worry is that if Bear Stearns collapsed, it would be forced to sell its assets, such as sub-prime mortgage securities, into the market at cut down prices.
This would have lowered their value even further.
And that could have affected the solvency of many other big US banks.
And if other big banks went bust, then credit would dry up rapidly across the whole economy, slowing economic activity.
That is why the New York Federal Reserve felt it had no choice but to intervene to support a short-term rescue deal.
But there may be other banks that are already at risk of reaching a similar position to Bear Stearns.
Why is the rescue being carried out by JP Morgan Chase?
For technical reasons, Bear Stearns was unable to borrow money directly from the New York Federal Reserve, because it is not a commercial bank.
So the money is coming from one of the biggest US commercial banks instead.
However, they will be able to borrow any of the funds they need for the rescue from the Fed, so their shareholders will not be exposed to any risks.
So they are essentially a conduit for the Fed bail-out.
The Fed's new $200bn emergency loan facility only comes into effect on 27 March.
Friday, 14 March 2008
Will the bank survive in its current form?
It is not clear that Bear Stearns can survive intact.
It is essentially now at the mercy of the market.
JP Morgan Chase, has only committed to provide cash for 28 days, as long as it is underwritten by the US central bank.
JP Morgan Chase is also looking at how to provide long-term financing, and there may be international investors or other banks who want to invest in the stricken bank.
But if it cannot find anyone who wants to back it, then its future may be bleak.
Bear Stearns could be broken up or taken over by JP Morgan.
Or it could sell a big equity stake to a foreign investor, such as a sovereign wealth fund.

http://news.bbc.co.uk/2/hi/business/7296827.stm