Smallest Of The Big Us Banks Meets Rapid End
The Age
Tuesday March 18, 2008
A YEAR ago, US investment bank Bear Stearns had a market value of about $US23 billion. Early last month it was worth almost $US13 billion. Yesterday it sold for $US270 million - 1.2% of its former value.
Bear Stearns' woes began in the middle of last year when the US mortgage market caused two hedge funds to collapse. Now the smallest of the major Wall Street banks will be eaten up by JPMorgan, a bigger fish that will guarantee all Bear Stearns' financial obligations - with a little help from the US Federal Reserve. The US now had a bank rescue to match that of Britain's Northern Rock as the "global credit crunch" of the late 2000s took its toll, said Macquarie Group interest rate strategist Rory Robertson. The British Government nationalised the deposit-taking Northern Rock earlier this year. The US Federal Reserve will provide up to $US30 billion to fund Bear Stearns' "less-liquid" assets. "The Fed stepped in to prevent damaging 'contagion', where the failure of one financial institution to meet its obligations might see the rest of the US financial system - and then the US and global economies - quickly dragged down," Mr Robertson said. Standard & Poor's yesterday lowered its long-term credit rating on Bear Stearns by three notches, to BBB. However, S&P credit analyst Philip Bayley said that would be reviewed in light of JPMorgan's purchase plans. JPMorgan has a AA- rating. At the weekend, the Federal Reserve cut its lending rate to banks from 3.5% to 3.25%, extended its loan period, and created a new lending facility for the biggest investment banks. Tonight its Federal Open Market Committee meets to decide on the key interest rate, and will announce the result at 5.15am Melbourne time. Credit Suisse Asia Pacific's head of rates trading, Sean Keane, said the market now expected the US Federal Reserve to cut its official cash rate from 3% to 2%. Investors in the overnight interest rate swap market had been pricing in 70 basis points of rate cuts. But the recent financial-sector troubles have boosted expectations to about 110 basis points of rate cuts.
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