JPMorgan Chase & Co and the Federal Reserve Bank of New York on Friday agreed to provide emergency financing to Bear Stearns, after the investment bank said its cash position had deteriorated sharply.
Bear Stearns shares fell nearly 40 per cent after the news of the financing, the latest in the Fed's efforts to soothe financial markets that are increasingly fearful.
"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 Bear Stearns Chief Executive Alan Schwartz.
"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."
Bear Stearns, the fifth-largest US investment bank, has more exposure to the US bond markets than its competitors, and has a large mortgage-backed securities business.
Standard & Poor's said on Thursday that subprime mortgage-related write-downs are likely more than halfway done, but more write-downs in other areas--including prime mortgages-are still possible.
The Wall Street Journal reported on Thursday that some clients are increasingly reluctant to trade with Bear Stearns, and that hedge funds are moving assets away from the investment bank's prime brokerage.
"The situation is very much that Bear Stearns was very close to the edge and it was much worse than we all thought," said Michael Klawitter, currency strategist at Dresdner Kleinwort, Frankfurt.
"It raises severe concerns over other banks. (Bear Stearns) wasn't a small bank, it was the second largest underwriter of mortgages last year. For the situation to deteriorate in that way is not good news and it will add further to jitters," he added.