Bear Stearns Failure Puts World Economy at Risk

Brendan Keenan
Independent
March 16, 2008

Fears about the state of the world economy increased dramatically after the US central bank had to rescue one of the world’s biggest and best-known investment banks.

The 80-year old Bear Stearns bank will probably have to be sold and broken up after other banks stopped dealing with it for fear the New York-based bank would run out of cash. The investment bank’s closure of two of its hedge funds last July sparked the present credit crisis.

The Federal Reserve announced that it would provide whatever emergency funding Bear Stearns could afford to borrow.

In a statement approved unanimously by its board, the Fed said it “will continue to provide liquidity as necessary to promote the orderly financing of the financial system”.

An investment bank would not normally qualify for such funding, which will have to be channelled through another bank, JP Morgan. It is believed to be the first time such a scheme has been used since the Great Depression of the 1930s.

Earlier this week, the Federal Reserve, aware of the growing problems in the US system, said it would make $200bn (€128bn) available to banks which were finding it difficult to conduct their normal business. Leading banks and securities firms have posted $195bn (€125bn) in asset writedowns and credit losses since the beginning of 2007.

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