Federal Reserve Extends Its Lending Authority In Bear Stearns Bailout

The Federal Reserve Bank has decided to extend its own authority in an effort to “stem a credit crisis that is engulfing the financial system and threatening a deep recession, ” says the Wall Street Journal.

For the first time securities dealers, effective today and for at least the next six months, may borrow from the Fed on much the same terms as banks. The Fed also lowered the rate charged on such borrowings from what’s known as its discount window by a quarter of a percentage point, to 3.25%, and extended the maximum term to 90 days from 30.

“These steps will provide financial institutions with greater assurance of access to funds,” Federal Reserve Chairman Ben Bernanke said in announcing the emergency initiatives yesterday evening.

Meanwhile, Bear Stearns reached a deal to sell itself to JPMorgan for a measly $2 a share:

Bear Stearns had a stock-market value of about $3.5 billion as of Friday — and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm — at any price — to a big bank willing to assume its trading obligations or file for bankruptcy.

“At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust,” said one person involved in the negotiations. “Those were the only options.”

To help facilitate the deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns’s less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company. Fed officials wouldn’t describe the exact financing terms or assets involved. But if those assets decline in value, the Fed would bear any loss, not J.P. Morgan.

So that sounds fun! Big hugs to all you Wall Street types. CNBC says there is a flood of sad-looking Bear Stearns employees carrying binders and garbage bags full of personal items out the front door.

J.P. Morgan Buys Bear in Fire Sale, As Fed Widens Credit to Avert Crisis [WSJ]
Central Bank Offers Loans To Brokers, Cuts Key Rate [WSJ]
(AP Photo/Jin Lee, file)