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The fall of Bear Stearns
[ 2008-03-21 09:31 ]

 

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This is the VOA Special English Economics Report.

This week, the crisis in credit markets claimed Bear Stearns. The eighty-five year old investment bank in New York agreed on Sunday to sell itself to J.P. Morgan Chase. The price: just two dollars a share, as part of a rescue plan organized by the government.

Bear stock had traded at seventy dollars last week, and one hundred seventy last year.

The fall of Bear Stearns developed quickly. Banks were no longer willing to lend money to the company. The problems largely involved short-term loans, called repo borrowings, that are secured by assets like securities.

The problem was that lenders no longer knew the value of the assets that secured Bear's debt. Bear Stearns invested heavily in securities based on risky home loans.

Unable to get new loans, the bank suffered a liquidity crisis. By last Thursday, investors started withdrawing their money. This put more pressure on the bank to sell assets that no one wanted to buy. The next day, Bear informed the Securities and Exchange Commission that it would fail if nothing was done.

Officials from the Treasury and the Federal Reserve wanted a deal to save Bear Stearns before markets opened this week in Asia. They worried that if Bear failed, it could lead to even more problems.

The central bank agreed to lend J.P. Morgan up to thirty billion dollars to finance the purchase of Bear's less-liquid assets. The loan will be secured with those assets, and the Fed will take responsibility for them.

To increase liquidity in the market, the Fed also agreed to lend money to securities dealers, including investment banks. The central bank has not done this since the Great Depression of the nineteen thirties.

Last week the Fed offered banks up to two hundred billion dollars in loans. And twice this week it cut its discount rate for direct loans to banks. The Fed also lowered the target rate for overnight loans between banks for the sixth time in six months. It cut the federal funds rate by seventy-five basis points, to two and a quarter percent.

Shareholders in Bear Stearns will vote on the takeover by J.P. Morgan. Some are expected to oppose the low-cost deal. Bear employees own about one-third of the stock in their company.

There was some good news this week for financial stocks. Three major investment banks reported earnings that were better than expected for the three months ending February twenty-ninth.

And that's the VOA Special English Economics Report, written by Mario Ritter. I'm Steve Ember.

(Source: VOA 英語點津姍姍編輯)

 
 
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