World markets face another harrowing day of investor panic after the near collapse of banking giant Bear Stearns in Wall Street trading.
The Federal Reserve, in an emergency move, threw the fifth largest US investment bank a lifeline by allowing JPMorgan Chase to borrow Fed funds on its behalf.
The move came as Bear Stearns stock tumbled as much as 50 per cent - knocking more than US$3 billion ($3.68 billion) off its market capitalisation by the end of the day.
The US central bank authorised JPMorgan Chase to borrow for Bear Stearns, which cannot borrow directly from the Fed's pool of discounted emergency cash - a privilege reserved for banks that accept deposits.
JP Morgan is now widely tipped as the likely buyer for the struggling bank. The 28-day emergency line of funding for Bear Stearns came just days after the bank dismissed market rumours of a cash crunch and said it was still a healthy player in the global web of trading and finance.
But Bear Stearns' problems emerged because it has more exposure to the US bond markets than its competitors and has a large mortgage-backed securities business.
Bear Stearns does not take deposits from the public but is a market maker in mortgage bonds, a primary dealer in US Treasury notes and clears or settles securities transactions for other brokers and investment funds.
Its meltdown heightened concerns that there may be other banks facing liquidity issues and prompted a selloff which saw the S&P 500 drop 2.08 per cent and the Dow Jones 1.6 per cent.
Local brokers will be hoping the New Zealand market can buck the global trend which also saw falls in Europe and the UK.
The NZX-50 is coming off a bad day which saw it shed 2.09 per cent on Friday and touch a new low for the already dismal year.
The index is more than 19 per cent down on the high of 4332, which it hit last October.
In New York the focus will move to the likely takeover of Bear Stearns.
While its cheap stock price could attract some suitors keen to buy its mortgage finance and trading assets, its liquidity problems may prevent a deal from being consummated, analysts and bankers said.
CNBC reported that Bear Stearns was being "actively shopped". While JPMorgan was the most likely suspect, CNBC said it was not the only company to receive a pitch to buy the company. Other potential buyers include Merrill Lynch and foreign companies such as HSBC, Barclays and Royal Bank of Scotland, some bankers and analysts said.
"If you think about a company like Bear, they don't have hard assets, just computers, office space and people, and one would imagine that people at Bear are polishing up their resumes," said James Ellman, portfolio manager at Seacliff Capital in San Francisco.
"That's how Wall St works - when a firm is in trouble, clients leave and your best employees leave. We've seen this story many times before," Ellman said.
It's unclear whether Bear Stearns will be able to survive the "run on the bank" that Schwartz described if customers continue to flee and its businesses deteriorate further.
"JPM might buy it for a dollar. I mean you're going to get a good price. Ultimately you have to ascertain if the assets are worth more than the liabilities," Barish said.
The ultimate size of the Fed's effort on behalf of Bear Stearns is uncertain and depends on the ability of the investment bank to provide collateral for credit, Fed staff said.
The process was initiated after Bear Stearns called the Fed, the staff said. That triggered the emergency meeting of the Fed Board on Friday morning.
Under the arrangement, JPMorgan will post collateral from Bear Stearns at the discount window.
The Fed was looking to Bear Stearns for collateral to repay the loan, not to JPMorgan, staff said.
* 2007 Net Income: US$233 million
* Assets: US$395.362 billion
* Employees: 14,153
* Market Cap (After the big sell-off): US$3.5 billion
* 2007 Net Income: US$15.365 billion
* Assets: US$1.562 trillion
* Employees: 180,667
* Market Cap: US$124.1 billion
- REUTERS, BLOOMBERGBy Liam Dann @LiamDann Email Liam