The takeover was part of a rescue plan backed by the US Federal Reserve. It was accompanied by a government loan facility at a newly discounted rate with a significantly extended loan period.
But the Fed’s action had an unsavoury side effect. The fact that the US government took such drastic steps triggered negative sentiment across the world and led to a slump in global share prices.
European and Asian stock markets fell heavily in reaction to the news and on March 17 London’s FTSE 100 index touched as low as 3.5% down. In Paris the Cac 40 slumped 3.2% and in Frankfurt the Dax fell 3.8%.
At the time of writing the full implications of the Bear Stearns situation are still unclear but it has the potential to get much worse.
The stark reality is Bear Stearns is Wall Street’s fifth-largest investment bank. Had it not been bailed out it would have faced a run on its credit agreements, with its collapse the inevitable result. Such a disastrous scenario would have hit stock market confidence even harder.
Although the action taken by the Fed has led to fiscal turbulence, I believe that things aren’t quite as disastrous as the media hype would have us believe.
Of course I agree that things are bad, but the one saving grace is that the US government reacted quickly to the crisis.
Following the revelation of Bear Stearns’ difficulties on March 14, the Fed held a series of emergency talks over the weekend and enacted its rescue plan on March 17.
Compare this to the Northern Rock fiasco and the months of deliberation, discussion and finger pointing undertaken by chancellor Alistair Darling.
There’s no doubt that those who display a degree of decisiveness and certainty are those who instill the most confidence in their decisions.
Although the action taken by the Fed may be thought of as rash by some, I think it was decisive and in my opinion this can only help to restore confidence. Right now this is exactly what we need.