Bear Stearns gets bailout from Fed

March 14, 2008 6:24:56 PM PDT
The housing crisis shook the very foundations of Wall Street on Friday, after a run on one of the biggest investment banks in the country almost caused it to collapse.

Bear Stearns companies watched it stock sudden drop more than $5 billion dollars in a matter of minutes -- that's half the company's value. Quickly, the Federal Reserve and rival J.P. Morgan Chase, swooped in to bail out the bank by guaranteeing billions in loans.

The CEO of Bear Sterns likened this to a depression-era run on a bank.

All this week, there have been rumors the company was having problems. Whether they were true or not, investors lost faith in the company and the rumors became reality.

Bear sterns was in the grip of a near death experience. Its overnight demise could have sparked panic on Wall Street.

Terry Connelly is an economist at Golden Gate University.

"They weren't waving, they were drowning and J.P Morgan and the fed have rushed out like a lifeguard at Bondi Beach to save a firm that is very much caught in the undertow of the credit crisis," said Golden Gate University Dean Terry Connelly, Ph.D.

The financial bailout keeps Bear Stearns on life support for 28 days. But it's not just the big guys with a cash flow problem.

Home foreclosures are hitting everyone hard; a point Federal Reserve Chairman Ben Bernanke addressed again on Friday.

"The Federal Reserve is strongly committed to fully employing our authority, expertise and resources to help alleviate their distress," said Chairman of the Federal Reserve Board Ben Bernanke.

Wall Street has already interpreted those comments to mean another significant interest rate cut, when the fed meets next week, perhaps as much as a full percentage point.

"The fed has to be very careful. It's walking a fine line. It knows it needs to reduce interest rates dramatically to free up money," said David Callaway from Marketwatch.

While President Bush continues to insist the economy is not in a recession, many analysts say the debate is over and that's actually good news because the Fed is poised to take action.

Case in point, the dramatic propping up of Bear Sterns this morning.

"We're going to live with anxiety for awhile but I think it's because we've passed this state of ideological debate, and we're now getting to the practical side of business of fixing the markets and getting them up and running again, there's hope here," said Connelly.

J.P. Morgan, the company that's stepping in to rescue Bear Stearns, is considered one of Wall Street's strongest banks right now. Many analysts say eventually, J.P. Morgan could end up owning Bear Stearns.