One more Bear on our endangered species list....

So Bear Sterns is in trouble again. They had big problems last year, when two of its hedge funds blew up, but it looks like this could ultimately be a killing blow for them.

What happened? According to the WSJ (this article's citation is available at the bottom of this post, in case you can't get to it), Bear's management hasn't been doing a good enough job at reassuring their investors and other stakeholders (e.g. customers and business partners) that the company is financially stable. Well, BSC's investors got nervous, and there was an enormous deflation of their market cap ( 5 day price chart, 1 year, 1 year compared to another ibank, Goldman Sachs), as everyone scrambled to get out. It looks like the S&P is feeding the fire, downgrading Bear's credit rating to BBB, and suggesting that further downgrades are likely. Forbes.com reports their market cap, as of 3:45 today, to be around $5bln, about half that of their book value.

Losing all of that money is a death knell for an investment bank, which depends on the capital provided by equity investments in them for the liquidity necessary for daily operations.

So what is being done? Well, when commercial banks have liquidity issues, our government's central banks offer them emergency funds, in the form of secured fed loans, in order to keep afloat. In this case, JP Morgan Chase & Co, a commercial bank (among other things) is serving as a conduit through which the Federal Reserve Bank of New York can offer Bear Sterns emergency funding. In case you are wondering why they are a part of the deal, JP Morgan is on a very short list of commercial banks, which doesn't include Bear Sterns, allowed to borrow through the Fed's discount window.

The WSJ discusses in a different article how the Fed and not JP Morgan, is bearing the risk of the loan. This decision, which invokes an ancient ordinance from the 1930s, is potentially exposing the Fed to more risk at the moment than they normally have, lending through their discount window to their usual staple of banks during regular money market operations.
This is decision is quite unusual, and is probably more indicative of our government's larger concern about the state of America's financial sector than their concern over saving one (albeit very big) investment bank.

This is only a short-term solution for larger financial problems that probably beleaguer Bear Sterns, which explains the S&P's downgrade decision. Bear Sterns is now forced to consider all of its strategic options, which includes being bought out.

A side note: As this WSJ article suggests, JP Morgan is incurring costs of its own by helping the fed in this way. Obviously, those costs don't include bearing any risk on their behalf, the fed is shouldering that burden. But the work involved is consuming JP Morgan's employee's valuable time, which apparently has a real affect on their stock price.

*In case you can't reach the Wall Street journal article, the title is "Bear Sterns to Get Backing From J.P. Morgan, N.Y. Fed" and was written by Kevin Kingsbury, Andrew Dowell, and Serena Ng.