The Federal Reserve, in a series of emergency moves to try to stabilize world financial markets, voted Sunday to cut its interest rate on direct loans to banks by a quarter of a percentage point, and to provide a new line of credit to securities dealers.
The Fed acted on a day that saw JPMorgan Chase acquire faltering investment bank Bear Stearns at a fire sale price. On Sunday night, the Fed also provided financial backing that facilitated the Bear Stearns sale.
Wall Street negotiators scurried to take strong action to rebuild investor confidence before the Monday opening of Asian markets.
Stock markets in Asia were down sharply at the opening, with Japan's Nikkei sliding more than 3%, and hitting its lowest level in two years early before rebounding. The dollar continued its slide against the Japanese yen.
The Fed last week said it would lend to Bear Stearns, using authority rarely invoked.
Fed Chairman Ben Bernanke, in a statement read to reporters during a hastily arranged conference call, said the central bank was "working to promote liquid, well-functioning financial markets."
In one move, the Fed lowered the discount rate — the rate it charges for direct loans to banks — to 3.25% and extended the loan period to 90 days from 30 days. The discount rate is separate from the federal funds rate, the Fed's main tool for influencing the broader economy. The move is intended to insure that commercial banks have access to funds they need.
The Fed said that, starting Monday, a group of large securities dealers will be able to borrow from the central bank under a new program. They'll be able to use investment-grade securities such as mortgage-backed bonds as collateral.
Bear Stearns, the fifth-largest investment bank on Wall Street, agreed to be acquired by JPMorgan Chase late Sunday after a cataclysmic week in which investors and counterparties lost confidence in the firm's ability to survive.
JPMorgan Chase said it would pay $236.2 million for Bear, or $2 per share, a bargain-basement price for a firm that just seven days ago commanded $70 per share. Last week, as rumors circulated through the financial community that Bear Stearns was strapped for cash, a classic "run on the bank" forced the firm to beg the Fed for a bailout, which the central bank agreed to Friday. Bear Stearns' stock closed at $30 that day.
The firm's collapse is a sign of how volatile the financial markets are as banks struggle through a credit crunch. It also represents the latest casualty from the implosion of the subprime mortgage market last year, which has sent home values downward nationwide.
"Bear Stearns had no choice but to sell," says Brad Hintz, an analyst at Sanford Bernstein. "The loss of confidence is a life-threatening risk for a securities firm."
The situation at Bear Stearns deteriorated at a stunning pace. Last Monday the company issued a press release denying it faced liquidity problems, and its CEO Alan Schwartz repeated that message Wednesday on CNBC. On Friday, Schwartz said market chatter caused a rapid deterioration in the firm's liquidity.