Bear Stearns is getting its loan from the Fed via an intermediary. Rival securities firm JPMorgan Chase & Co. is borrowing the money from the Fed at the central bank's "discount window," then lending it to Bear Stearns, with the Fed responsible for any losses.
Normally only commercial banks can borrow from the discount window. That would exclude Bear Stearns because as an investment bank it mostly acts as a financial advisor to corporate clients and doesn't offer traditional checking and savings accounts. JPMorgan Chase operates both a commercial bank and an investment bank.
The Fed acted Friday under a section added to the Federal Reserve Act in 1932, during the early stages of the Great Depression. The section, not used since that era, authorizes the Fed to make discount window loans to "individuals, partnerships and corporations" in emergency situations.
"There's no way the Fed is going to let any major firm go under," said Michael Madden, managing partner at BlackEagle Partners, a New York private equity firm. "They'd be afraid there would be another panic somewhere."
The Fed's move was the latest in a series of increasingly aggressive and creative steps to address the credit crisis, including cutting its key short-term interest rate five times since September.
On Tuesday, the Fed said it would lend $200 billion in Treasury securities to major banks and brokerages, accepting mortgage-backed bonds as collateral. The move was an effort to prevent the value of mortgage securities from eroding further and make financial institutions more willing to lend.
The Fed's program might have helped Bear Stearns, but the first such swap won't occur until March 27, apparently too late for the company.
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$395 billion
In assets for Bear Stearns
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$854 million
Net loss in fiscal 4th quarter
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14,000
Employees
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$242,000
Average pay per employee
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0
Bonuses paid to top executives last year
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Source: Bear Stearns Cos.
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A history of bailouts
The rescue of Wall Street brokerage Bear Stearns Cos. by the Federal Reserve with the help of JPMorgan Chase & Co. is the latest in a long line of bailouts of financial firms, including an intervention by JPMorgan founder John Pierpont Morgan a century ago. Here is a chronology of major events:
The Panic of 1907
