STOCKS PLUNGED and the dollar hit new lows after Bear Stearns, one of the most venerable names on Wall Street, received a massive emergency bail-out, raising fears that the bank could collapse within days.
The decision by the monetary authorities to throw a temporary lifeline to the bank followed a night of negotiations with regulators, led by Timothy Geithner, chairman of the Federal Reserve Bank of New York, and came after a slump in its shares amid concerns over its liquidity.
It is likely to pave the way for a sale or liquidation of the company in the coming weeks.
The move underlines the Fed concerns at the depth of the credit crunch and its determination to prevent a major bank failure.
Bear Stearns alerted the Federal Reserve yesterday that its finances had "significantly deteriorated" within 24 hours following a run on the bank fuelled by rumours about its exposure to a troubled hedge fund.
Reviving a rarely-used provision dating from the Great Depression, the Fed agreed to secure funding of Bear Stearns for 28 days by another bank, JP Morgan Chase.
"The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system," the board said in its statement.
Shares in Bear Stearns plunged as much as 53 per cent as the US market opened.
They were down 38 per cent at $35.51 in New York midday trading. The stock has lost more than three-quarters of its value over the past year.
Wall Street's fifth largest investment bank, the 85-year-old Bear Stearns has been at the centre of the US mortgage debt crisis and two of its hedge funds that specialised in the subprime mortgage market collapsed last summer.
JP Morgan is working with Bear Stearns to secure permanent funding or perhaps to buy the ailing bank at a discounted price.
Fears about Bear Stearn's precarious state rose late last week as some banks began demanding additional collateral and refused to engage in credit-swaps with the bank.
As rumours about these moves spread, clients who had already been nervous about the bank's future became more concerned and began moving business away.
Bear Stearns' chief executive, Alan Schwartz, had claimed on Wednesday that the bank had ample liquidity but as anxious investors started selling on Thursday, it became clear that the bank was running out of cash.
Yesterday, Mr Schwartz said: "Our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."
However, the sale of the bank as a whole or in parts seems increasingly inevitable.
President George W Bush praised yesterday's move by the Fed, which said last week that it would supply up to $200 billion in loans to cash-strapped financial institutions and is expected to cut interest rates further next week.
"It was a strong action by the Fed and they did so because some financial institutions that borrowed money to buy securities in the housing industry must now repair their balance sheets before they can make further loans," Mr Bush said.
"Today's actions are fast moving, but the chairman of the Federal Reserve and the secretary of the treasury are on top of them and will take the appropriate steps to promote stability in our markets," said Mr Bush. - (Additional reporting Financial Times service).
