Chief executive Alan Schwartz, who had appeared on CNBC Wednedsay saying the bank’s balance sheet and liquidity levels were fine, blamed problems on persistent rumors of imminent collapse that the company couldn’t suppress.
“We have tried to confront and dispel these rumors and parse fact from fiction,” Schwartz said Friday. “Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.”
It isn’t at all clear yet how bad things are at the company or what specific event, beyond the market rumors, prompted the crisis. JPMorgan Chase and the Federal Reserve Bank of New York have tossed Bear Stearns a lifeline, with JPMorgan agreeing to give secured financing for 28 days.
The bank didn’t say how much Bear Stearns was borrowing.
Adding to the sense of alarm, JPMorgan sought to reassure its own shareholders Friday about the potential exposure it was taking on. The New York Fed will secure the loan JPMorgan is giving Bear. “JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk,” it said in a statement.
The Federal Reserve said Friday that its board had voted unanimously to approve the JPMorgan/Bear agreement. “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,” it said.
The Securities and Exchange Commission said it was in contact with the U.S. Treasury and the Fed during the negotiations with JPMorgan. “We will continue to work closely together in a way that contributes to orderly and liquid markets.”
Spokeswomen for JPMorgan and Bear Stearns did not immediately return calls.
Shares of Bear Stearns plunged 45% in morning trading, which will only worsen its liquidity crisis. Its market cap has been pummeled by rumors of its impending demise. At its recent 52-week high, the company’s stock was valued at $21 billion. Earlier this week, it was $10 billion. In trading Friday it had declined to $5 billion.
The options market has been anticipating a sharp plunge in shares of Bear Stearns for days. Monday, someone bought 1,000 lots of put options, a bet the stock will fall, at a $10 strike price.
In this morning’s statement, the companies said JPMorgan is working with Bear Stearns on “strategic alternatives,” but offered little detail. That could mean anything from finding more permanent financing to finding a buyer for Bear Stearns’ businesses.
“We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations,” Bear’s Schwartz said in the statement. “The company can make no assurance that any strategic alternatives will be successfully completed.”
Earlier this week, the Federal Reserve announced a new program for its prime dealers, which comprise 20 banks and brokerage firms that agree to make markets in Treasury securities. The program was to allow the dealers to turn in hard-to-sell mortgage securities in return for easy-to-sell Treasury bonds.
The program was seen then as a move to help out Bear Stearns, which had been reeling from its heavy exposure to the mortgage market. Bear was among the biggest packagers and sellers of mortgage securities, whose value has now plunged in the credit crisis.
In fact the troubles in the credit markets began in part at Bear Stearns last year, when two of its hedge funds, heavily exposed to mortgage securities, faltered. Bear Stearns has already replaced its top management, putting Schwartz, an investment banker by trade, in the chief executive spot in January and shuffling former CEO James Cayne off to the role of non-executive chairman.
In recent days, Schwartz has been forced to defend the firm against rumors of a liquidity crisis. As recently as Wednesday he was on television saying the firm’s balance sheet and liquidity were fine.
