Fed Races to Rescue Bear Stearns In Bid to Steady Financial System

How rapidly things are changing in the financial world. Full fledged panic is cascading as each new day brings on further fears of more bad news. This is now a rolling thunder of fear. Bear Stearns made some disastrous investment decisions and failed to properly manage its risks. Consequently, it is getting mangled in the gears of the financial system. A month ago it was in terrible shape. Now it is almost cadaverous. It will be sold; that much it known. What remains to be settled is whether it'll be in one piece, or in various pieces; and who will buy it. Its stock price is lower than its book value. That means that investors value at less than it would be worth if it were dismantled and sold piecemeal.

"Yesterday's developments were the latest in a series of blows to the financial system that began in August. Then, banks became so wary of lending to each other that money markets seized up and the world's central banks had to intervene. The trigger was a surge in delinquencies on U.S. subprime mortgages and the end to a spectacular rise in home prices.

But the turmoil has spread since to almost every corner of the credit markets. "The realization that mortgages might not be paid off led lenders to realize that other loans might not be paid off," said Douglas Elmendorft, a former Fed economist."

This statement means that banks didn't manage risk properly. Who doesn't realize that loans might not get paid back?

Morale among Bear's 14,000 employees, already flagging from days of speculation the firm was in trouble, sank Friday morning. As they learned of the emergency funding, some called their spouses, warning they could soon be out of a job, one employee said. Employees have been barred from trading the shares because of longstanding "lockups" weeks prior to the company's earnings announcements.

Can't cut bait and jump ship, because their shares are frozen. Imagine how low morale must be.

"At Northern Rock, it was depositors running. At Bear Stearns, it was counterparties" -- the parties a financial firm trades with -- said Tim Bond, a Barclays Capital strategist. In Northern Rock's case, the firm's problems only grew after it got a central-bank bailout, because of the effect on customers' confidence in the firm. Ultimately, the U.K. nationalized the lender.

If the other guy's going down, let 'im, as long as I don't go, too.

Bear, although not one of the giants of Wall Street, long had a reputation as one of the most astute risk managers.

Really? Deserved?