Fed comes to Bear Stearns' rescue; shares dive

By Joseph Giannone and Dane Hamilton

NEW YORK (Reuters) - Bear Stearns, slammed by a sudden cash crunch, hammered out an emergency funding deal with the Federal Reserve and JPMorgan Chase, intensifying fears the global credit crisis will claim more victims and driving Bear's shares down by as much as half.

It was the Federal Reserve's first rescue of a broker since the Great Depression and its latest effort to soothe financial markets roiled by fallout from rising mortgage defaults.

The 28-day emergency line of finance on Friday came just two days after Bear BSC.N, which has been hard-hit by its heavy exposure to the faltering U.S. mortgage market, dismissed market rumors of a cash shortage and said it still was a healthy player in the global web of trading and finance.

But its tune changed Friday. Bear Stearns' chief executive, Alan Schwartz, explaining why the bank turned to the Fed and a rival bank, said: "Our liquidity position in the last 24 hours had significantly deteriorated.

"We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations," said Schwartz.

But inside Bear, the fifth largest U.S. bank, and on Wall Street, the view was grim.

"The mood is somber," said one Bear Stearns equities salesman who declined to be quoted by name for this story. The buzz at the firm was that there could be a takeover deal as soon as Monday, he said.

Investors fled. Bear stock plunged on record volume, closing down 45.9 percent at $30.85 and shearing $3.2 billion off its market value. Earlier, the stock fell as low as $28.42, its lowest price since the 1998 Asian debt crisis.

And Bear debt default insurance surged to a record amid fears for the bank's future, and demand for put options remained strong on bets the stock will fall further.

The news bashed other financial stocks and dragged down both U.S. and European markets. The Dow Jones index shed 194 points to close at 11,951, and the pan-European FTSEurofirst 300 index closed down 1.1 percent, led by bank shares.

Though Bear has been one of the hardest hit banks during the credit crisis, it stunned investors by announcing that the Federal Reserve Bank of New York and JPMorgan agreed to provide an unspecified amount of secured funding for up to 28 days.

The Fed will provide financing to Bear through JPMorgan, which said it is working closely with Bear "on securing permanent financing or other alternatives." The Fed approved the arrangement in an emergency meeting Friday morning.

Treasury officials participated in a series of conference calls beginning on Thursday with the Fed, the New York Fed and the Securities and Exchange Commission as it became apparent that Bear's problems could damage the broader financial system, a Treasury official said.

JPMorgan, which has largely avoided the financial losses that have hobbled Citigroup (C.N) and other investment banks, also has much at stake. As one of the largest players in debt and derivatives markets, it would face losses if Bear is unable to meet its obligations.

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