Bear Stearns on last legs?

Well, let's put it this way: When you're in the banking business and most everybody has lost confidence in both the quality of your assets and your ability to maintain adequate liquidity, it's not exactly a good situation. Bear Stearns has been in precarious shape for many months now - you might recall that two of its hedge funds came apart because of subprime-related exposure - but concern turned into crisis in just the past 24 hours. It's always hard to trace the origins of these things, especially on a real-time basis, but there could have been some connection with the pending collapse of Carlyle Capital, a mortgage-heavy investment fund. One potential concern is Bear having to seize collateral from Carlyle, but then not being able to sell any of it off. That would cause further losses and writedowns. Remember your tutorial from "It's a Wonderful Life": Bear does have cash on hand, but nowhere near enough if creditors demand to be paid at the same time.

Whether this fear is justified really doesn't matter. That's what led to this morning's emergency infusion of cash. JPMorgan will lend Bear what it needs, take the bank’s crappy collateral, and then refinance the collateral with the Federal Reserve Bank of NY. In other words, JPM provides the money, with the Fed's backing. That will go on for 28 days while JPMorgan works with Bear Stearns to figure a way out of this mess. One obvious possibility would be someone buying the bank at a discounted price. Here's what CEO Alan Schwartz said in a statement:

“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,” he said.

What this has done, among other things, is cause Bear Stearns stock to tank by 47 percent at last check. (The Dow is down around 200 points.) The bank's chairman, James Cayne, has lost more than $200 million in the value of his Bears Stearns stock. The CEO has lost $40 million. All this in a single day. The WSJ's Deal Journal notes that British billionaire Joe Lewis spent around $860 million to buy 7 percent of Bear Stearns back when the stock was worth more than $100 a share (it’s now at $29.86). So why should you care about Joe Lewis, Jimmy Cayne or any of the other fat cats? Because it speaks to the extremely fragile state of the entire financial system, which contrary to Sam Zell's assertions could become a very big deal for all of us (he more or less pooh-poohed the problems in a recent CNBC interview). If only the banks knew the magnitude of the potential losses. But they really don’t. The ultimate worry is not so much Bear Stearns but a second or a third major bank finding itself in a similarly precarious situation.

Here are the NYT, WSJ and FT overviews.