'Marketplace' Report: Bailing Out Bear Stearns
ANTHONY BROOKS, host:
From NPR News, it's DAY TO DAY. There's news today of a federal bailout for a Wall Street investment firm. Bear Stearns says it's getting emergency funding from the federal government along with help from another investment firm, J.P. Morgan Chase. MARKETPLACE's Janet Babin is with us. Janet, the company had been saying all week that there was no problem, that it had plenty of cash, but it looks like that wasn't the case.
JANET BABIN: Yes, Anthony, it's hard to tell whether the rumors were a self-fulfilling prophecy for Bear Stearns, but for an investment bank, reputation is everything. I mean, once you come under that cloud of suspicion, no one wants to do business with you.
Bear Stearns president and CEO Alan Schwartz said in a statement on the company's Web site today that Bear Stearns was the subject of market rumors and that while trying to get rid of the rumors amidst the market chatter, the company's liquidity significantly deteriorated.
So now the federal reserve and J.P. Morgan will provide funding for Bear Stearns over the next 28 days. We don't know how much funding. We just know that if needed that funding is going to be there.
BROOKS: Well, a lot of us might not have money invested with Bear Stearns, but it is the nation's fifth-largest investment bank. Is that why the Feds have decided to act?
BABIN: Well, historically speaking, we know from the Great Depression, from our history books, that bank failures can ripple through the economy lightning-fast, and they can end up hurting all of us, the entire system. I spoke to finance professor James Angel about this. He's at Georgetown University, and he says this is really an acknowledgement from the federal government that Bear Stearns is too big to just let fail.
Mr. JAMES ANGEL (Georgetown University): They provide the back office for a lot of Wall Street firms to basically make sure that the paperwork gets done on trades after they take place. So you know, if Bear Stearns were to fail, then that could cause serious operational problems on the rest of Wall Street.
BABIN: So he's saying essentially because of this clearing business that Bear Stearns had, it would've exposed just too many people. A failure would've made too many people exposed to potential downfall.
BROOKS: Janet, do we know why Bear Stearns, as opposed to other investment houses or another one in particular, is having trouble?
BABIN: Well, Anthony, Bear Stearns did have a lot of its investments in mortgage securities and subprime mortgages. Some analysts said that the company wasn't as diversified as it needed to be, and last summer two hedge funds that were managed by Bear Stearns collapsed. But the fear is - and this is an unknown - will there be other investment houses that were over-exposed to subprime or to mortgages that are now just as vulnerable as Bear Stearns, and we don't know about them yet?
And I mean, after today's bailout was announced, shares of Bear Stearns lost about half their value. They made somewhat of a comeback. Other stocks were roiled as well. I mean, Bear Stearns is an 86-year-old company, and this might be the end of them. So we'll have to see what happens.
BROOKS: Thanks, Janet. That's Janet Babin of Public Radio's daily business show, MARKETPLACE, produced by American Public Media.
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