Bear Stearns Still Struggles Even After Getting A Big Bailout
Friday, March 14, 2008SUSIE GHARIB: An emergency bailout today for one of Wall Street's biggest firms, Bear Stearns. This morning the Federal Reserve and JPMorgan Chase opened their coffers to the troubled investment bank to prevent it from going under. The unprecedented move was prompted after Bear's cash situation worsened in the past 24 hours. In reaction, Bear's stock plunged by almost 50 percent. We have two reports this evening looking at what's next for Bear and why the Fed stepped in. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Federal Reserve is known as the lender of last resort which experts note says a great deal about the health of Bear Stearns. The move to rescue Bear raises questions about its ultimate fate, not to mention the stability of financial markets. Banking analyst Dick Bove says Bear cannot be allowed to fail because it's too big, with billions of dollars in securities and billions in loans out to other financial firms.
DICK BOVE, BANKING ANALYST, PUNK, ZIEGEL & CO.: If Bear were to fail, it would have to start selling those securities into the market, calling those loans, forcing other people to sell securities into the market and it would be literally that domino effect whereby people start moving out of securities all over the country and actually even outside the United States. It would precipitate a crash.
PRATT: Veteran stock market pro Muriel Siebert says today's bailout was about restoring confidence in financial markets.
MURIEL SIEBERT, CHAIRMAN, MURIEL SIEBERT & CO: I think there's probably more but we don't know the depth of this. I think they're doing this so it doesn't trigger other failures.
PRATT: All week Bear has been deflecting liquidity rumors as many of its clients have refused to do business with the company. Bear executives explained today the firm's liquidity deteriorated significantly in the last 24 hours, forcing it to look for short-term financing. But experts say the firm needs a long-term solution which may mean a takeover. In a conference call, Bear CEO Alan Schwartz said the company has been looking at its options with the help of investment bank Lazard.
ALAN SCHWARTZ, PRES & CEO, BEAR STEARNS: We will pursue alternatives with a focus on ensuring that we can handle and protect our customers well and at the same time maximize shareholder value.
PRATT: Maximizing shareholder value is something Bear has done a dismal job of in recent months with its heavy exposure to the dwindling mortgage business. Bear shares plummeted more than 40 percent today and are off about 65 percent since January. Concerns about Bear and credit market headwinds have rocked stocks for weeks. S&P equity strategist Alec Young says today's market sell-off could've been worse.
ALEC YOUNG, MARKET STRATEGIST, STANDARD & POOR'S: The good news is the stock market's priced in a lot of bad news on the credit front. So, from that standpoint, you know it's encouraging that we've been able to take this terrible news on Bear and the market is sort of still standing.
PRATT: Wall Street will hear from Bear again on Monday after the market closes. The firm said today it was releasing its first quarter results three days ahead of schedule to give investors a look at its financial positions. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Darren Gersh in Washington. Speaking before housing advocates, Fed Chairman Ben Bernanke had only this to say about financial markets.
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: I've had a busy morning.
GERSH: That's one way to put it. This may be the first time since the great depression the Federal Reserve has used its power to prop up a Wall Street investment bank. The Fed's board voted this morning to pump an unknown amount of cash into Bear Stearns for 28 days. A Federal Reserve staff member says JPMorgan was the conduit for the transaction, acting almost like an ATM machine, with all the risk of a loss put on the Federal Reserve's books. Former Fed Governor Laurence Meyer says the quick action helped restore calm today.
LAURENCE MEYER, VICE CHAIRMAN, MACROECONOMIC ADVISERS: If we didn't have a really big decline in the stock market, it doesn't seem to me like credit spreads have significantly opened up. But in that sense the Fed got the job done.
GERSH: In a statement, the Fed promised to provide more cash if needed to promote the orderly functioning of the financial system. Not an easy task in what Meyer now calls the worst financial crisis of the postwar period.
MEYER: We're in a period of significant slowdown and significant increase in the risk of recession. So we are in a somewhat unprecedented situation, very acute. But the Fed has acted very aggressively.
GERSH: Meyer hopes innovative Fed policy will help the nation avoid a broad market meltdown. But banking analyst Dick Bove says it would still be a good idea for the world's central bankers to join the Fed and announce a coordinated campaign to make money available to financial markets.
DICK BOVE, BANKING ANALYST, PUNK ZIEGEL: We need a coalition of the willing right now to assure people that the financial system is in strong and healthy condition because the fact of the matter is it is. It is not the problem that the financial system doesn't have liquidity. The problem is people are too frightened to make that liquidity available and that's what caused the crisis.
GERSH: While the Federal Reserve is acting aggressively to support the financial markets, some members of Congress say it's time for the Federal government to step in and clean up the housing collapse that helped start this mess in the first place. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
