Liquidity Problems Slaughter Bear

TSC Staff

Updated from 1:47 p.m. EDT

Bear Stearns(BSC Quote - Cramer on BSC - Stock Picks) on Friday said it had secured a short-term credit from the New York Federal Reserve through JPMorgan Chase(JPM Quote - Cramer on JPM - Stock Picks).

Bear's stock had been plagued with rumors of liquidity problems all week, but CEO Alan Schwartz had dismissed them earlier this week. JPMorgan will lend to Bear through a secured loan facility backed by the New York Fed's discount window. The facility has an initial period of 28 days, but Bear and JPMorgan did not specify an amount.

The banks said they were in talks about more permanent financing, but Bear warned "no assurance that any strategic alternatives will be successfully completed."

Breaking: Cramer on How to Make Money Off Bear Stearns

"Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity," Schwartz said in a company statement. "We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, 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."

Schwartz said during an afternoon conference call that flagging confidence among clients and lenders began to eat away at the bank's liquidity resources, even though it's capital ratios remained strong.

"The concerns on the part of counterparties, on the part of our customers and lenders got to the point that a lot of people wanted to get cash out," Schwartz said during the relatively brief call, noting that client demands to withdraw accelerated Thursday.

Bear shares recently were plummeting 39.6% to $34.46. It was dragging other brokerages down with it. Lehman Brothers(LEH Quote - Cramer on LEH - Stock Picks) was shedding 9.8%, Morgan Stanley(MS Quote - Cramer on MS - Stock Picks) was down 4.1%, and Goldman Sachs(GS Quote - Cramer on GS - Stock Picks) was down 3.4%. All four brokerages are set to report earnings next week.

JPMorgan stock is down 3.6%.

The move comes just days after the Fed made the latest of several recent moves to boost liquidity in the credit-strangled markets by creating the Term Securities Lending Facility. Through the facility, the Fed intended to lend Treasury securities to primary dealers -- including Bear -- for 28 days in exchange for collateral including debt and residential-mortgage-backed securities from government-sponsored entities Fannie Mae(FNM Quote - Cramer on FNM - Stock Picks) and Freddie Mac(FRE Quote - Cramer on FRE - Stock Picks), as well as non-agency AAA/Aaa-rated private-label residential mortgage-backed securities.

The idea was to allow cash-starved brokerages to get hard-to-trade mortgage paper off its book temporarily, in exchange for more liquid Treasuries. But the facility does not open for business until March 27.

CNBC, citing senior Fed officials, said JPMorgan had to act as a pass-through, because as a brokerage, Bear cannot borrow at the discount window. The window, available to commercial banks and other depository institutions, carries a stigma in the market as a lender of last resort.

The Fed issued a statement saying that its board had unanimously approved the arrangement between JPMorgan and Bear.

"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 Fed statement said.

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Timeline: Retracing the Week That Preceded the Bear Stearns Bailout

What did they know and when did they know it...

Monday

Financials dive after the open as rumors fill the Street that Bear Stearns has a major liquidity issue.

At noon, Alan "Ace" Greenberg, Chairman of Bear Stearns' executive committee tells CNBC those liquidity issues are "totally ridiculous." The stock is down 10% on the day at that point, and then a Bear spokesman tells Bloomberg the same thing. The stock does not move.

At 5:00 p.m. EDT, a Bear press release cites President and CEO Alan Schwartz as saying "Bear Stearns' balance sheet, liquidity and capital remain strong."

Tuesday

The stock suffers another bloodying after influential bank analyst Dick Bove at Punk Ziegel cuts his price target on Bear to $45 from $67.

The liquidity rumors persist and the stock drops another 5% as Bear again publically denies any problems.

Wednesday

CEO Alan Schwartz goes live on CNBC telling David Faber that Bear's liquidity position has not changed and that the balance sheet has not weakened. Schwartz says it continues to have $17 billion or so sitting on the balance sheet at the parent, plus unpledged collateral at its subsidiaries.

Thursday

Despite the denials from Greenberg and Schwarz, the rumors persist and traders are seeking permission before acting in long-term transactions with Bear. A Wall Street Journal story says there is no actual proof that Bear faces a liquidity crisis, and executives insist that it isn't. Nonetheless, one analyst points out the mere fear of a crisis can be enough to overrun a firm.

Bear's CEO Didn't Lie

Friday

In today's premarket, JPMorgan and the New York Fed stun the market with a Bear Stearns bailout. In a press release Bear Stearns CEO Schwartz says in part "...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."

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