Little-used law invoked to bail out Bear Stearns

Washington: Federal Reserve chairman Ben Bernanke invoked a law last used four decades ago to keep Bear Stearns from collapsing after the securities firm sought emergency funding from the central bank.

The loan to Bear Stearns required a vote on Friday by the Fed's Board of Governors because the company is not a bank, Fed staff officials said. The central bank is taking on the credit risk from Bear Stearns collateral, lending the funds through JPMorgan Chase & Co because it is operationally simpler to accomplish than a direct loan, the staff said on condition of anonymity.

Bernanke took advantage of little-used parts of Fed law, added in the 1930s and last utilised in the 1960s, that allow it to lend to corporations and private partnerships with a special board vote. The Fed chief probably sought to stave off a deeper blow to the financial system from a Bear Stearns collapse, former Fed researcher Keith Hembre said.

"The Fed really doesn't have any obligation to help a non-bank aside from its role or responsibility to keep the financial markets functioning," said Hembre, who helps oversee $107 billion as chief economist at FAF Advisors in Minneap-olis. "They made a judgment, probably an accurate one, that they're not going to function very well if you've got a full-blown crisis with a major Wall Street firm."

The Fed said in a statement that it will "continue to provide liquidity as necessary to promote the orderly functioning of the financial system", repeating reassurances the central bank has made often since credit strains arrived in August.

Unanimous

The statement said the Fed Board unanimously approved the arrangement with JPMorgan and Bear Stearns.

The Fed Board, which met on Friday at 9.15am Washington time, typically delegates such discount-window lending authority to its regional reserve banks when it comes to loans to banks.

"There's a clear realisation among people both in the official sector and the financial markets that some of the institutions we have built over the last 100 years are not well adapted to the modern 21st century financial system," said former New York Fed research director Stephen Cecchetti.

"A lot of what we've been seeing have been creative innovations to deal with problems that the institutions were not built to handle."

The senior staffers declined to describe how large the loan to Bear Stearns is, and whether a private-sector bailout was attempted first before the Fed extended credit through JPMorgan. The staff officials said the Fed used its authorisation under the law several times in the 1960s, although they did not immediately have further details.