Fed's Bear Stearns Move Breaks New Ground
MELISSA BLOCK, host:
From NPR News this is ALL THINGS CONSIDERED, I'm Melissa Block.
MICHELE NORRIS, host:
And I'm Michele Norris.
The stock market started the day sharply lower but ended the day mixed on the news that JPMorgan was taking over the investment firm Bear Stearns with the backing of the Federal Reserve. President Bush did his best to reassure jittery investors.
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.
NORRIS: The President spoke a day after the Fed approved a remarkable series of steps. First, there's the decision to extend credit to investment banks for the first time, and then there's the arranged marriage of JPMorgan and Bear Stearns. We have several reports starting with NPR's Jim Zarroli.
JIM ZARROLI: Fed officials spent much of the weekend behind closed doors trying to engineer a rescue of Bear Stearns. The firm has had heavy mortgage losses, and on Friday, it announced that it was in the middle of a severe cash crunch. Had the venerable firm gone under, it might have dragged down a lot of other firms it did business with, and that, says economist Nariman Behravesh of Global Insight, was something the Fed was anxious to avoid.
Dr. NARIMAN BEHRAVESH (Chief Economist, Global Insight): What the Fed is trying to do is bring about a much more sensible sort of resolution to this problem without basically worsening the existing financial panic.
ZARROLI: Finally on Sunday night, just as the Asian stock markets were opening, word came that JPMorgan Chase had agreed to acquire the firm using taxpayer-backed loans. The announcement didn't have quite the effect that regulators hoped for. One big problem was the rock-bottom price Bear Stearns had fetched, just $2 a share. That values the company at $236 million. The firm's headquarters building in New York alone is said to be worth several times that. The price was so low that one of the firm's biggest shareholders, Joseph Lewis, predicted today that the deal would be rejected. Whatever happens, the low price seemed to suggest that the market's problems were far worse that people thought, and share prices were unusually volatile for much of the day. Former Fed economist Vince Reinhart.
Mr. VINCE REINHART (Former Federal Reserve Economist): There's a very adverse signal attached. They basically put the financial threat meter up to red. And if Homeland Security did that, you wouldn't be surprised to see the, you know, the main thoroughfares out of the city clogged with cars. We've seen the equivalent of financial markets.
ZARROLI: So this could backfire?
Mr. REINHART: It's possible.
ZARROLI: The fact that that didn't happen today was only a little reassuring. The Bear bailout was one of the Fed's efforts to keep the mortgage mess from spreading. It also announced it would allow more Wall Street firms to borrow money from its so-called discount window. Again, Vince Reinhart.
Mr. REINHART: What the Federal Reserve did was quite significant. It basically redrew the lines between the Central Bank and the financial system.
ZARROLI: The move takes place as new questions are being raised about the health of other investment banks, including Lehman Brothers. Each time the Fed has tried to address the credit crunch, its efforts have been swamped by a wave of new anxieties and concerns. The response today underscores the dilemma facing the Federal Reserve, says Campbell Harvey, professor of Finance at Duke University. He says the more the Fed does to address the credit crunch, the more it risks alarming people about the economy.
Professor CAMPBELL HARVEY (International Business, Duke University): It's a difficult task that they have, because in a way, it's stems the problem for Bear Stearns, but people are looking very anxiously at some of the large investment banks and thinking which one is going to be next.
ZARROLI: Tomorrow, Fed policymakers will once again try to address the crisis. They're scheduled to meet and are widely expected to cut interest rates again, perhaps by as much as three-quarters of a percentage point. But as the troubles at Bear Stearns have shown, the economy is in the grip of stubborn fears, fears that one more rate cut probably won't dispel.
Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.