Fed Aids Bear Stearns to Boost Investor Confidence

Friday's move by the Federal Reserve and JPMorgan Chase to bail out Bear Stearns was designed to boost investor confidence in the investment banking giant. The $400-billion Bear Stearns was considered "too big to fail."

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SCOTT SIMON, host:

This is WEEKEND EDITION from NPR News. I'm Scott Simon.

Coming up, former New York mayor Ed Koch's spin on the Eliot Spitzer scandal and the 2008 presidential elections.

But first, the fate of the huge investment bank Bear Stearns is uncertain this weekend. Yesterday the company said it had to turn to the Federal Reserve and JP Morgan Chase for an emergency bailout. The company is in the middle of what bankers call a liquidity crisis, what most people would call being cash poor. For months now, Bear Stearns has had to contend with rumors about the size of its mortgage losses.

We're joined now by NPR's Jim Zarroli. Jim, thanks for being with us.

JIM ZARROLI: Hi, Scott.

SIMON: What happened to Bear Stearns and what's the significance for the country?

ZARROLI: Well, Scott, do you remember the famous bank-run scene in "It's a Wonderful Life?"

SIMON: Of course.

ZARROLI: One of the TV networks were running that yesterday just to sort of illustrate what was going on. And I said to myself, you know, that's silly. This isn't a bank run. But then I started talking to an economist who said, well, yeah, it essentially is. You know, the situation is this: You know, there were a lot of rumors this week that Bear Stearns was in trouble, investors started pulling money out, Bear Stearns didn't have the money on-hand to pay.

Company says, you know, we're still in pretty good shape but we just don't have all the cash we need to pay all the investors, and that's essentially a bank run.

SIMON: Now, they don't stand alone in the industry, though, do they? I mean, does their near-death experience now suggest that something else and larger is going on?

ZARROLI: Sure. But I think that from the very beginning of this kind of mortgage crisis, Bear Stearns was really in a special position. They were one of the companies the people whispered about. Very early on, two of their hedge funds collapsed because of mortgage losses.

Now, the company has always said, you know, this is a contained problem where otherwise, okay, we're not in trouble. As recently as two days ago the chief executive of the company went on CNBC to say, you know, there's no liquidity crisis. And, you know, maybe that was true at the time but people didn't believe him. And on Thursday they started pulling their money out and, then we had the trouble that we saw yesterday.

SIMON: The company says that they could clean this up in a month - 28 days to be precise.

ZARROLI: Yes. And they're going to get a lot of help, I think, from the Federal Reserve to do that. Bear Stearns is one of the companies that is too big to fail. It's a $400-billion company. And I think that if it failed, it would really hurt confidence in the economy.

So I think what you're seeing now is the Fed is coming in to help Bear Stearns pay off its investors for reasons that maybe are too complex to get into here. In fact, the Fed is actually working through JP Morgan Chase. But the guaranty is really coming from the Fed. This is a loan; Bear Stearns is going to have to put down some of its assets as collateral.

But the idea is that, you know, investors are going to see that the mighty Federal Reserve is coming in to stand behind Bear Stearns, and they'll feel more confident about the company and they'll invest in the company again. That's the hope anyway.

SIMON: And Morgan could buy it?

ZARROLI: You know, JP Morgan Chase is going to be in a better position than a lot of companies to do that because it's kind of in on the ground floor. But any bank could conceivably do it. The one problem is that at this point in the financial crisis a lot of banks have big losses of their own, and it's unclear how many of them would even want to merge with Bear Stearns, but anything could happen.

SIMON: NPR's Jim Zarroli in New York. Thanks very much.

ZARROLI: You're welcome.

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