NEW YORK — On the verge of a collapse that could have shaken the very foundations of the U.S. financial system, investment bank Bear Stearns Cos. was bailed out Friday by a rival and the federal government. The near-miss raised new alarm about the credit crisis — and whether other big firms might be in jeopardy.
The rescue came from JPMorgan Chase & Co. and — in an extraordinary step — the Federal Reserve, both rushing to pump new money into the venerable Wall Street firm after its financial state deteriorated so much within a 24-hour period that it threatened to fail.
Bear Stearns stock lost nearly half of its market value, about $5.7-billion, in a matter of minutes and pulled the broader market down with it. The Dow Jones industrial average fell nearly 200 points.
If Bear Stearns were to go under, "it has the potential of bringing down the whole market," said Richard Bove, a Punk, Ziegel & Co. analyst. "This is the crescendo of the crisis."
JPMorgan and the central bank agreed to extend loans for 28 days to Bear Stearns, the nation's fifth-largest investment bank and the one hit hardest by the subprime mortgage mess.
Two hedge funds managed by Bear Stearns failed last summer, setting off a credit crisis that has swept up banks and brokerages around the globe.
In backing up JPMorgan, the Fed dusted off a rarely used, Depression-era provision to provide loans. It also said it was ready to step in to fight an erosion of confidence in the nation's largest financial institutions.
For Bear Stearns, the crisis started when market speculation grew that it might have to seize collateral — mostly mortgage-backed securities worth next to nothing — from the private equity firm Carlyle Group.
Carlyle, which owns about 200 companies, runs a bond fund and has come under intense pressure during the past week from creditors demanding collateral to back their investments.
Carlyle's holdings in the Tampa Bay area include Dunkin' Donuts, Baskin-Robbins, AMC movie theaters, Hertz rental cars, Manor Care nursing homes and Mattress Giant, which recently bought Clearwater Mattress.
As speculation swelled in the market, investors, customers and lenders raced to withdraw their money or rescind their credit lines. By Thursday night, Bear Stearns' chief executive, Alan Schwartz, said, the bank realized that the withdrawals might outpace the bank's resources — so it reached out to JPMorgan for help.
JPMorgan, the nation's third-largest bank, has been hurt far less by the mortgage mess than other financial institutions. It will provide secured loans to Bear for four weeks — insured, in essence, by the Fed.
Times staff writer Jim Thorner contributed to this report.