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JPMorgan and The Fed Lend a Hand

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Is it a bailout? Or a prelude to a purchase of the firm? JPMorgan Chase & Co. announced March 14 that “in conjunction with the Federal Reserve Bank of New York, it has agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days,” via the The Fed’s Discount Window, according to JPMorgan Chase Web site. The bank had no comment on this in response to an IA request.

“The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system. The Board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear Stearns this morning,” according to a release on The Fed’s Web site.

CNBC reports that a senior official at The Fed has stated that JPMorgan Chase will not be held responsible if Bear Stearns defaults on the loans.

Numerous news organizations have been carrying stories this week about rumors of a liquidity crisis at Bear Stearns, and on the company’s Web site, CEO and President Alan Schwartz, says in an announcement: “Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, 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.” But, the announcement on Bear Stearns’ Web site adds: “The company can make no assurance that any strategic alternatives will be successfully completed.” The company is scheduled to announce first quarter 2008 results on March 20.

The Fed’s Discount Window is available to banks but not usually to non-bank corporations directly. There are several types of lending eligibility that banks can use with the Discount Window, but generally Discount Window loans are very short-term and used as a back-up to longer-term, regular types of financing. Interest rates at the Discount Window are a bit higher than the target Fed Funds rate. Currently the Discount Window rates are 3.50% for Primary credit, for “generally sound” banks, and 4% for Secondary credit–for banks on less-sound footing–while the Fed Funds target rates is 3%.

Last August 17, amidst turmoil in credit and stock markets, The Fed changed its policy of very short-term or overnight lending for “generally sound” banks eligible for primary credit Discount Window loans, allowing for loans for up to 30 days, and with only a 50 basis point premium over the Fed Funds target rate. In addition, according to The Fed’s Web site, “In unusual and exigent circumstances, the Board of Governors may authorize a Reserve Bank to provide emergency credit to individuals, partnerships, and corporations that are not depository institutions,” but that would be at higher interest rates than eligible banks would receive.