Bear Stearns rescued by Fed, JP Morgan Chase

Nearly half of the company’s value was wiped out in minutes.

NEW YORK (AP) — Bear Stearns Cos., one of the most venerable names on Wall Street, turned to a rival bank and the federal government for a last-minute bailout Friday to prevent it from collapsing.

The Federal Reserve responded swiftly to pleas from Bear Stearns that its coffers had “significantly deteriorated” within a 24-hour period as rumors about the bank’s situation fueled the Wall Street version of a run on the bank. Central bankers tapped a rarely used Depression-era provision to provide loans, and said they were ready to provide extra resources to combat an erosion of confidence in America’s biggest financial institutions.

Nearly half the value of Bear Stearns, or about $5.7 billion, was wiped out in a matter of minutes as investors felt the bailout signaled that the credit crisis has reached a more serious stage, and now threatens to undermine the broader financial system — and the U.S. economy.

“My guess is by next week, there will be rumors of other large, familiar institutions” that might be in financial trouble similar to Bear Stearns, said Anil Kashyap, a professor at the Graduate School of Business at the University of Chicago.

Bear Stearns plummeted 47 percent, or $27, to $30 in trading Friday.

No one has disclosed how large the financing offered to Bear Stearns is.

Bear Stearns, the nation’s fifth-largest investment bank, made its fortune dealing in opaque mortgage-backed securities — a strategy that backfired amid the worst housing slump in a quarter-century. The bank has racked up $2.75 billion in write-downs since last year, and releases first-quarter results on Monday that could show more losses.

Alan Schwartz, Bear Stearns’ chief executive, said the bank had enough money to keep operating at the start of the week. However, market speculation swelled Thursday — leading investors, customers and lenders to withdraw their business or rescind credit lines.

By that night, Schwartz said the bank recognized that the pace of withdrawals could outstrip the company’s resources. He then contacted JPMorgan Chase & Co. — the third-largest U.S. commercial bank — for help.

JPMorgan, which has been hurt far less by the mortgage morass than other investment banks, is providing secured funding to Bear Stearns for 28 days, and those loans will in essence be insured by the Federal Reserve. Schwartz said this will buy Bear Stearns time — allowing it to “convince customers and counterparties that we have the ability to fund ourselves every day, to do business as usual.”

Schwartz confirmed, as many on Wall Street suspected, that Bear Stearns could now be up for sale. He told analysts during a conference call that the short-term funding “is a bridge to a more permanent solution.” Bear Stearns is working with investment bank Lazard Ltd. to explore its options.

Top executives from Bear Stearns and JPMorgan were discussing the outright sale of Bear Stearns to JPMorgan, according to a person familiar with the talks who was not authorized to speak on the record.