Prometheus 6

"We're on a knife's edge," said Eugene White, an economics professor at Rutgers University who studies financial crises. "The danger is if people's confidence is lost in a place like Bear Stearns, no one will lend to anybody."

But while the Fed may have contained the immediate crisis, the move reinforced widening anxiety over the health of other banks and investment funds exposed to the credit meltdown. Markets tumbled in the hours after the funding plan was announced, with the Dow Jones industrial average finishing the day down 1.60 percent, or nearly 195 points. 

Fed Comes To Rescue As Wall St. Giant Slips
Bear Stearns Gets Emergency Funds Via J.P. Morgan
By Neil Irwin and Tomoeh Murakami Tse
Washington Post Staff Writers
Saturday, March 15, 2008; A01

The Federal Reserve took the extraordinary step yesterday of providing emergency funding to one of Wall Street's venerable firms, Bear Stearns, after it ran out of cash to repay its lenders.

The Fed used a little-known power it last exercised in the 1960s to stem a run on Bear Stearns that could have sent multibillion-dollar losses cascading across the world financial system, causing more failures on Wall Street and threatening to choke off global economic growth.

The Fed's action, arranged in a series of pre-dawn deliberations yesterday, is one of the most significant government efforts to save a private firm in modern times. The nearest parallels are the New York Fed-engineered buyout of the hedge fund Long-Term Capital Management in 1998 and the bailout of Continental Illinois Bank in 1984.

Critics characterized the Fed's move as a bailout that inappropriately intrudes on the free market and could lead banks to keep taking risks like those that imperiled Bear Stearns. Other analysts said the action was necessary, given the precarious state of world financial markets.