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Monday, March 17, 2008

FED approves $30 million credit line for JPMorgan to acquire Bear Stearns

Bear Stearns is one of the biggest firms on Wall Street and has been on the edge of colapse due the faltering mortgage situation.

The Federal Reserve has just approved a $30 million dollar credit line so that JPMorgan could acquire Bear Stearns.

The Fed, working closely with bank regulators and the Treasury Department, raced to complete the deal Sunday night in order to prevent investors from panicking on Monday about the ability of Bear Stearns to make good on billions of dollars in trading commitments.

The Federal Reserve has also lowered the rate for borrowing from its discount window by a quarter of a percentage point, to 3.25 percent. Furthermore, the FED announced its biggest commitment yet to lend money to struggling investment banks.

The problems the banks are suffering now is one of their own making. They practiced some very bad lending habits, giving loans to people that could not afford them and anyone with a brain understands if you lend money to someone that you already know cannot pay it back, you will take the loss in the end.

Henry M. Paulson Jr., the current Treasury secretary, vigorously endorsed the Fed’s rescue efforts on Sunday and made it clear he was much less worried about the “moral hazard” of bailing out a Wall Street firm than he was about a chain reaction of defaults if Bear Stearns were to abruptly collapse.

The banks and those receiving the loans originally showed bad judgment and the FED is having to step in and bail them out, which means taking on those mortgage-backed securities.

Not that the Federal Reserve really had a choice but to step in, the banks on Wall Street are so interconnected that for one of the biggest, like Bear Stearns to completely fail, would trigger the domino affect with one right after the other falling over once the first tile had been tipped.

Former Treasury Secretary Robert Rubin last week described the situation as "uncharted waters," a view echoed privately by top government officials. Those officials have been scrambling to come up with new tools because the old ones aren't suited for this 21st-century crisis, in which financial innovation has rendered many institutions not "too big too fail," but "too interconnected to be allowed to fail suddenly."

From Wall Street Journal:

Pushed to the brink of collapse by the mortgage crisis, Bear Stearns Cos. agreed -- after prodding by the federal government -- to be sold to J.P. Morgan Chase & Co. for the fire-sale price of $2 a share in stock, or about $236 million.

Bear Stearns had a stock-market value of about $3.5 billion as of Friday -- and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm -- at any price -- to a big bank willing to assume its trading obligations or file for bankruptcy.

"At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust," said one person involved in the negotiations. "Those were the only options."

The weekend was busy for everyone involved, rushing to get the details ironed out so that the announcement could come before the markets opened up today.

This is not the last move, nor potential bailout, because the FED has their eye cast about for other "mortgage-backed securities" institutions that are suffering from the same malady as Bear Stearns has been, and we can expect more bailouts to occur.