WASHINGTON — The Federal Reserve took dramatic action on multiple fronts Sunday night to avert a crisis of the global financial system, backing the acquisition of wounded investment firm Bear Stearns Cos. and increasing the flow of money to other banks squeezed for credit.
After a weekend of marathon negotiations in New York and Washington, the central bank undertook a broad effort to prevent key financial players from going under, including the unprecedented offer of short-term loans to investment banks and an unexpected cut in its lending rate to banks to 3.25 percent from 3.50 percent.
As part of the deal, JPMorgan Chase & Co., a major Wall Street bank, will buy Bear Stearns for a bargain basement price, paying $2 a share, or $236.2-million, for a venerable institution that still plays a central role in executing financial transactions.
Bear Stearns' stock closed at $57 on Thursday and $30 on Friday. JPMorgan was unwilling to assume the risk of many of Bear Stearns' mortgage and other complicated assets, so the Fed agreed to take on the risk of $30-billion worth of those investments.
The Fed "is working to promote liquid, well-functioning financial markets, which are essential for economic growth," Chairman Ben Bernanke said in a conference call. Treasury Secretary Henry Paulson, who was deeply involved in the talks though not a formal party to them, indicated support for the actions.
The Fed's moves were meant to reverse a rising tide of panic that has buffeted Wall Street as banks and other institutions have found it increasingly difficult to get credit. While the steps may head off a generalized run on Wall Street banks, the central bank's intervention looks unlikely to calm the recent volatility on markets as the trading week begins.
Asian markets opened sharply lower, with the Japanese Nikkei index down more than 3 percent in this morning's trading. And the dollar was down sharply, hitting a new low against the euro and the lowest level against the yen since 1995.
The extraordinary measures were made necessary, in the view of the policymakers, by the most dire threat facing world financial markets in years. Bear Stearns, in particular, was confronting a run on the bank as investors were too fearful of the future to make loans to the nation's fifth-largest investment firm.
If it had been allowed to fail, senior officials believed, that would have created a cascading crisis of confidence that could have brought down several other leading firms and dragged world markets with them.
The officials said their efforts were meant not to save shareholders of Bear Stearns but to keep markets from collapsing.
JPMorgan, one of the few Wall Street firms to receive only modest scars from the meltdown in the market for U.S. mortgage loans and other debt, agreed to buy Bear Stearns just two days after making an emergency loan to the investment firm.
The Fed's actions come just two days before the central bank's scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered. That key rate is at 3 percent and is expected to be cut at least by half a percentage point.
Information from the Associated Press was used in this report.