The world banking system was plunged into fresh crisis today as one of America’s biggest banks teetered on the verge of collapse.
Wall Street giant Bear Stearns admitted it could go bust despite emergency government funding – prompting panic in stock markets around the world.
Wall Street shares plunged and Bear Stearns lost half its $20 billion (£9.8 billion) value in seconds. Analysts said they feared every bank – including the British high street Big Four – were now at risk because of the credit crunch. Their shares were down sharply.
The FTSE-100 index at was down 62.0 at 5630.4 just before 4pm today.
Michael Klawitter of Dresdner Kleinwort in London said: “The situation is that Bear Stearns was very close to the edge and it was much worse than we all thought. It raises severe concerns over other banks.”
Today U.S. President George Bush insisted the American economy was “resilient”.
The bank had been facing rumours that it was in financial trouble. Today it revealed it had received emergency funding overnight from JP Morgan and the Federal Reserve, after a week of firm denials.
Bear Stearns lost half of its value within 30 minutes of the market’s open today.
While it was not clear exactly how much money Chase would pump into Bear, a person familiar with the bailout, who spoke on condition of anonymity because the talks are private, said Chase may end up buying Bear Stearns outright.
The ultimate size of Federal Reserve efforts to prop up the investment bank are uncertain and depend on the ability of the firm to provide collateral for credit, senior Fed staff said on Friday.
Bear Stearns said in a statement it is working with JPMorgan Chase to find permanent strategic alternatives to alleviate the liquidity problems, but could not guarantee they would be successful.
JPMorgan Chase is providing secured funding to Bear for 28 days, backstopped by the Federal Reserve Bank of New York. Bear Stearns and the Federal Reserve approached JPMorgan Chase about the financing and a potential deal, according to the source.
Rumours have persisted throughout the week that Bear Stearns was facing major liquidity problems, but the investment bank’s chief executive initially denied those rumours.
“Bear Stearns has been the subject of a multitude of market rumours regarding our liquidity,” Bear Stearns president and chief executive, Alan Schwartz, said in a statement.
“Amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.”