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STEVE INSKEEP, host:

It's MORNING EDITION from NPR News. Good morning. I'm Steve Inskeep. After the Federal Reserve spent the weekend trying to fix problems with the economy, President Bush says his administration is, as he put it, on top of the situation.

President GEORGE W. BUSH: One thing is for certain, we're under - we're in challenging times. But another thing is for certain, that we've taken strong and decisive action.

INSKEEP: The action taken in the last couple of days includes some extraordinary steps by the Federal Reserve. First, it approved the sale of the investment bank Bear Stearns. JP Morgan buys it for what can only be described as a rock-bottom price. Then the Fed decided to allow other Wall Street firms that may be in trouble to borrow directly from the Fed. And then the Federal Reserve cut a key interest rate. NPR's Jim Zarroli is following all these developments from New York City. Jim, good morning.

JIM ZARROLI: Good morning.

INSKEEP: So how are people responding to all this on Wall Street?

ZARROLI: Well, the - almost as soon as the market opened, the Dow went - fell quite a bit, down 180 points. It's rebounded somewhat. The financial stocks are - have been hit pretty hard, especially Lehman Brothers, which is another stock of which there has been a lot of whispering.

INSKEEP: Well, I have to wonder. If the Fed took all these steps and stocks dropped yet again, it suggests that maybe things are even worse than people realized on Friday afternoon.

ZARROLI: Well, I think that's the concern. It's also why stocks fell overseas. I think people just don't know. One of the problems is when you have these kinds of really dramatic moves by the Fed - and the steps that they took yesterday were pretty remarkable - people start to think not, you know, all the Fed is on top of the situation. They start to think does the Fed know something that we don't? And are conditions actually worse than we think?

INSKEEP: Well, I have to say, it is kind of shocking when you look at Bear Stearns, which not that many months ago had a share price of $171. It was down to 30 bucks a share on Friday, which sounded bad enough, but then you find out what the sale price is for JP Morgan.

ZARROLI: It's amazing. JP Morgan is buying Bear Stearns for $2 a share. That values the company at about $236 million. Now, keep in mind that the company's headquarters building on Madison Avenue is said to be worth at least a billion. You have a situation in which major shareholders in Bear Stearns have just seen their holdings wiped out. It is so low, the price that Bear went for, that there's a real serious question about whether shareholders will approve it.

INSKEEP: Does that mean that Bear Stearns liabilities might be even larger than people have realized?

ZARROLI: I think that is the concern. I think we don't really know what was said inside the negotiations, but we don't know. I mean, the fact is that Bear is facing this just onslaught of rumors right now about its mortgage losses. As you said, Friday, it came out and said it had these liquidity problems, which means, you know, investors were pulling their money and it was short on cash. Investment banks always need a lot of cash. So, really, the only way to keep doing business was to let itself be acquire by a big company like JP Morgan. JP Morgan is agreeing to absorb the firm, take over obligations using money guaranteed by the Fed. Here's what Bill Winters had to say. He's co-head of JP Morgan's investment bank.

Mr. BILL WINTERS (Co-Head of JP Morgan's Investment Bank): Bear Stearns is absolutely open for business. That's the purpose of the guarantee that we put in place that should give everybody in the market complete comfort that when dealing with Bear Stearns, you're backed by the full faith a credit of JP Morgan.

ZARROLI: Now, the Fed also had signed off on the deal. The alternative would have been to let a major investment bank collapse, and there really would have been really just unknowable consequences. All of these firms are just tied to each other in lots of different ways. Bear Stearns is, for instance, a very big borrower in the repo or repurchase market. That's a kind of short-term loan given to hedge funds and securities firms. If Bear had gone under, you might have seen that market dry up right away. A lot of other firms could have been dragged down, too.

INSKEEP: Jim, I want to follow up on a qualifier of something you just said. You said JP Morgan, which is paying, in effect, almost nothing for this company, is taking over Bear Stearns obligations guaranteed by the Fed. Doesn't that actually mean the federal government - the taxpayers are taking over Bear Stearns obligations? JP Morgan is passing the risk onto taxpayers, even as it picks up the pieces of this company?

ZARROLI: Yeah, I think that that's what you could say. I mean, and I also think it's one of the reasons why JP Morgan has agreed to step in here. Otherwise, it might not have done that.

INSKEEP: Can you explain the Fed's other moves in the last day?

ZARROLI: The most important thing it did was to open up the discount window to Wall Street firms. Traditionally, it's only lent to major commercial banks. Now that it can lend to investment banks, too, it also cut the discount rate by a quarter of a percent point. That's the rate the banks get charged when they borrow from the Fed. So these are really unusually aggressive moves right now, and it says something about the level of risks that we're facing.

INSKEEP: What's the next piece of news that might move the markets?

ZARROLI: Well, there is a - the Federal Reserve is going to meet tomorrow, and we can expect another big interest rate cut.

INSKEEP: Jim, thanks very much.

ZARROLI: You're welcome.

INSKEEP: That's NPR's Jim Zarroli in New York.

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