Careless talk is blamed for crisis
Mar 17 2008 by Andrew Mernin, The Journal
INVESTORS are braced for turmoil after the dramatic rescue of US investment bank Bear Stearns shook stock markets last week.
Rival JP Morgan Chase’s bail-out of the cash-strapped bank – backed with funds from New York’s Federal Reserve – raised the spectre of Northern Rock’s crisis in a new sign of the financial shockwaves from the credit crunch.
The news sent Wall Street’s Dow Jones Industrial Average down almost 200 points, or 1.6%, while London’s FTSE 100 Index fell 1% amid frayed nerves among investors.
David Buik, of spread betting firm Cantor Index, said: “This week could be very uncomfortable and volatile with the credit crisis taking its toll on confidence.”
With the Bear Stearns rescue casting a shadow over markets, several US investment banks are also due to report first-quarter earnings this week – which could add to the gloom with billions more in write-downs on investments linked to high-risk mortgages.
Spiralling defaults among US homeowners with poor credit have shattered confidence in bonds based on the mortgages, and banks fearful of losses are reluctant to lend to each other.
Bear Stearns was heavily exposed to these mortgage-backed investments, with two of its hedge funds collapsing in July last year in one of the early signs of the approaching crisis. Last week, rumours of problems at the business swept the market, leading to a cash crunch for Bear Stearns.
The firm looks after millions of dollars for hedge funds which began demanding their money back as the rumours grew and the company has no deposit base to fall back on.
Bear Stearns, which reports its own first quarter results today, blamed the “market chatter” for the liquidity issues. It is in talks with JP Morgan over “strategic alternatives” which could see the bank broken up.
Capital Economics economist Julian Jessop said: “Bear Stearns is still in business. In principle, the emergency funding could tide the bank over until confidence and liquidity improve.”
