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Bear skinned by credit crunch

It has been a nightmare few days for investors again as markets have been left reeling by the collapse and subsequent emergency sale of US investment bank Bear Stearns.

Markets have been pushed and pulled all over the shop as the US Federal Reserve continues to cut rate in a bid to abate growing market concern.

Bear Stearns was scooped up JPMorgan Chase earlier this week for just £116m, a fraction of its former value, after the Fed offered £14.89bn, or $30bn of emergency funding.

The crunch came as the 85-year-old bank was forced to admit holding £23.8bn in mortgage-backed securities, £8.4bn of which was difficult to value.

JPMorgan Chase purchased Bear Stearns at just 6 per cent of its trading value on Friday morning, reflecting the dramatic downfall of the bank. The Fed immediately cut the lending rate from 3.5 to 3.25 per cent to reduce borrowing costs for banks and financial institutions.
The transaction sent global market into a frenzy on Monday with the FTSE 100 closing at 5414.4 points, with the banking sector taking a hammering.

The Fed’s then continued its aggressive monetary policy on Tuesday by cutting rates by 0.75 per cent to 2.25 per cent. Market reaction has been mixed with the Dow Jones seeing a marked upturn that culminated in it closing with its highest one-day gain in five years.

By contrast, European shares remained down with credit issues still at the fore. The FTSE100 showed a small loss on Wednesday morning with banks again the main sector to be hit as shares in HBOS, Royal Bank of Scotland and Alliance & Leicester faltered.

BDO Stoy Hayward Investment Management economist Catherine MacLeod says: “The Fed is doing and will continue to do everything in its power to keep the financial system from melting down. This means that it has no choice but to aggressively loosen policy.

“By deciding to cut rates by 75 basis points to 2.25 per cent in defiance of market expectations of at least a 1 per cent drop, and by registering two dissenting votes for less aggressive policy, the Fed is doing what it can to manage the concerns about growth in the market whilst still keeping its powder dry. There will almost certainly be worse news on the horizon and the faster the Fed cuts rates now, the more limited the room for manoeuvre, as well as confidence building in the future.”

New Star fund manager Tim Steer believes more bank failings on either side of the Atlantic could still be in the offing.

He says: “Magic wands, like those waved by Ben Bernanke, are all very well but are not a lasting solution.

“This applies to both sides of the pond, as the UK banking sector results suggest a distinctly ostrich-like attitude to the depth of the hole it is peering down.

“Yes, banks look cheap by historic standards but until they decide to get real, I would suggest there could be more falls to come.”

Many may say now is the time to fill your boots but with the distrust in the markets , but few would dare open their wallets without some sort of security.


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