In a blizzard of activity on Sunday designed to shore up jittery financial markets, the Federal Reserve agreed to lend up to $30 billion to JPMorgan Chase to help it finance its purchase of Bear Stearns and to cut the discount rate the rate the central bank charges on direct loans to banks to 3.25% from 3.5%. In addition, the Fed said in a statement it will accept a wide range of collateral from borrowing banks.
Liquid, well-functioning markets are essential for the promotion of economic growth, the Fed statement said.
The Feds announcement came shortly after JPMorgan Chase said it agreed to acquire investment bank Bear Stearns Cos., which was facing a deep liquidity crisis, for $2 a share, or $236 million, a steep 93% discount to the stocks closing price last Friday. On Friday, despite losing 47.7%, Bear Stearns was still valued at $3.5 billion, based on its closing share price of $30. The day before, the stock had closed at $57 a share, valuing the firm at $6.7 billion.
Investors appeared little soothed by the activity, however, as stocks fell around the globe and the dollar continued its decline. In addition, S&P 500 futures expiring in June slumped 2% to 1,266.8 as of late morning in London, according to Bloomberg. The Stoxx 600 fell 3.5% to 293.43, while the MSCI Asia Pacific Index lost 2.4% to 132.71. Japans Nikkei tumbled 3.7% to the lowest level since August 2005, Bloomberg said.
The Fed had already cut the discount rate in-between regular policy meetings on Aug. 17, 2007, as the subprime mortgage crisis began to roil markets. But according to Bloomberg, the moves were the first emergency weekend action by the central bank in almost 30 years. The Feds next scheduled monetary policy meeting is slated for Tuesday, with Wall Street analysts expecting the 3.0% fed funds rate to be cut by at least 75 basis points.
In other measures to calm markets, the Fed said it was increasing the duration of loans it makes to banks to 90 days from 30 days.
Also, the Federal Reserve Bank of New York today is opening a new lending facility where the 20 primary dealers securities firms that buy Treasuries at auctions could use a broad range of investment-grade debt securities as collateral for their borrowings. This measure broadens the group of financial institutions that can borrow from the Fed, as the discount window is only for commercial banks.
The New York Fed lending facility will operate for at least six months and loans will be charged the discount rate.