Bear Stearns bail-out rocks markets

Mar 17 2008 by Sion Barry, Western Mail

INVESTORS are braced for more turmoil today after the dramatic rescue of US investment bank Bear Stearns shook stock markets on Friday.

Rival JP Morgan Chase’s bail-out of the cash-strapped bank – backed with funds from New York’s Federal Reserve – raised the spectre of Northern Rock’s crisis in a new sign of the financial shock waves from the credit crunch.

The news sent Wall Street’s Dow Jones Industrial Average down almost 200 points, or 1.6%, while the London’s FTSE 100 Index fell 1% amid frayed nerves among investors.

David Buik, of spread betting firm Cantor Index, said, “This week could be very uncomfortable and volatile with the credit crisis taking its toll on confidence.”

With the Bear Stearns rescue casting a shadow over markets, several US investment banks are also due to report first quarter earnings this week – which could add to the gloom with billions more in write-downs on investments linked to high-risk mortgages.

Spiralling defaults among US homeowners with poor credit have shattered confidence in bonds based on the mortgages and banks fearful of losses are reluctant to lend to each other.

Bear Stearns was heavily exposed to these mortgage-backed investments, with two of its hedge funds last collapsing in July last year in one of the early signs of the approaching crisis.

Rumours of problems at the business swept the market last week, leading to a cash crunch for Bear Stearns. The firm looks after millions of dollars for hedge funds which began demanding their money back as the rumours grew and the company has no deposit base to fall back on.

Bear Stearns, which reports its own first quarter results today, blamed the “market chatter” for the liquidity issues.

It is in talks with JP Morgan over “strategic alternatives” which could see the bank broken up.

Capital Economics economist Julian Jessop said, “Bear Stearns is still in business. In principle, the emergency funding could tide the bank over until confidence and liquidity improve.

“However, the precedent of Northern Rock is hardly encouraging – news of the Bank of England bail-out was sufficient to cause a run on the bank and ultimately force it into public ownership.”

He added, “It presumably is also now going to find it very difficult to retain and attract business.”

The US Federal Reserve last week led a drive by five central banks – including the Bank of England – to ease conditions in money markets by pumping more than $200bn (£98.7bn) into the system.

The Fed is expected to cut interest rates by 0.75% on Tuesday amid growing fears the world’s largest economy is on the brink of, or actually in, recession.

Recent surveys have revealed slumping US consumer confidence, falling house prices and the biggest decline in “non-farm” jobs for more than five years.

The Footsie, which was trading at seven-year highs above 6,700 last June, has lost more than 16% of its value in the past nine months. It closed on Friday at 5631.7, within sight of the lows seen in January when it suffered its worst one-day fall since the September 11 terrorist attacks in 2001.

Worrying times Fears sparked by the Bear Stearns bail-out sent shock waves across the stock markets. The FTSE fell 1% on Friday