Fed makes JPMorgan conduit for Bear Stearns loan

WASHINGTON (Reuters) - The Federal Reserve, in an emergency move believed not to have been used since the Great Depression, threw a lifeline to Bear Stearns on Friday by making JPMorgan Chase a conduit for funds to the investment bank.

At a hastily called meeting, the U.S. central bank's Board of Governors unanimously authorized JPMorgan Chase to borrow from the Fed on behalf of Bear Stearns, which cannot borrow directly from its "discount window" -- a privilege reserved for banks that accept deposits.

Commenting on the arrangement, the Fed said in a statement it was ready "to provide liquidity as necessary to promote the orderly functioning of the financial system" -- its third surprise announcement within the past eight days aimed at shoring up shaky credit markets.

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.

The Fed staff members declined to say why JPMorgan was selected as the intermediary.

Under the arrangement, JPMorgan will post collateral from Bear Stearns at the discount window. The Fed is looking to Bear Stearns for collateral to repay the loan, not to JPMorgan, staff said.

Bear Stearns' need for credit and whether it has collateral to post will determine the potential outer limits of the central bank's lending, they said, adding that the credit extensions have to be collateralized to the satisfaction of the Fed.

Fed staff told Reuters they believed it was the first time such an arrangement had been resorted to since the era of the Great Depression.

They said that while the precedent of extending central bank credit to non-depository institutions dates to the 1930s, the central bank had authorized lending to non-depository institutions in the 1960s. However, staff said they did not believe companies took advantage of that arrangement.

To approve the plan, the Fed drew on emergency procedures that allowed the Board to give its OK on a 4-0 vote. Under normal procedures, a minimum of five votes would have been required.

The normally seven-member Board currency has two vacancies and one member, Frederic Mishkin, was unable to participate in the meeting.

(Additional reporting by David Lawder; Editing by Gary Hill)