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Bear Stearns hits the rocks

14th March 2008 Print
One of the US's largest investment banks Bear Stearns has been forced to seek emergency funding. JP Morgan Chase and the Federal Reserve of New York have provided funds for 28 days.

This move has followed days of rumours that the US bank was in trouble, which, in turn, has seen institutional investors withdraw funds. The announcement initially saw shares drop, but not by as much as many would have thought, indicating, that perhaps the market was not that surprised!

The question on many analysts' minds is whether Bear Stearns will become the US Northern Rock?

Bear Stearns is one of largest players in the US mortgage market which is struggling under the strain of the sub-prime crisis and the ensuing credit crunch. This flows on from the collapse and winding up of a mortgage based Hedge Fund operated by US private equity group Carlyle Capital, where Bear Stearns is thought to be one of the Fund's creditors. The big issue here is that is this a step forward in the resolution of the credit crunch - with a move towards greater clarity - or a step back with banks and financial institutions becoming even more reluctant to lend money. This will only become apparent in the coming weeks.

It also increases the likelihood that at the Fed's next meeting on 18 March, interest rates will be cut by more than the market currently expects. A view bolstered by the fact that ahead of the Bear Stearns news the US market was up on the back of better than expected inflation figures for February.