A run on the Bearn Stearns

--The lifeline gives Bear access to cash for an initial period of 28 days. J.P. Morgan will borrow the money from the Fed and relend it to Bear. Exact terms weren't disclosed, but the amount is limited only by how much collateral Bear can provide, Fed officials said. --At Northern Rock, it was depositors running. At Bear Stearns, it was counterparties --But by Thursday afternoon, it was becoming clear within Bear that the firm couldn't withstand an accelerating retreat by worried customers -- in effect, a run on the bank. Securities firms that had been willing to accept collateral from Bear Stearns were insisting on cash instead. And the hedge funds that use Bear to borrow money and clear trades were withdrawing cash from their accounts. -- J.P. Morgan's risk officers were familiar with Bear's collateral because J.P. Morgan was the clearing agent for its trades; thus, J.P. Morgan seemed to be in good position to lend Bear money, say people familiar with Mr. Schwartz's thinking. --The Fed each day lends money to its 20 "primary dealers," including Bear, through its money-market "repo" operations, which provide funding for one to 28 days to influence the level of interest rates. But those operations don't permit the Fed to advance much money to Bear by itself, and the loans must be secured by the highest-quality collateral, which is now in short supply. (Term Security Lending Facility) --The Fed can lend directly through its "discount window," but ordinarily only to commercial banks. A 1932 provision of the Federal Reserve Act allows the Fed to lend to non-banks if at least five of its seven governors approve. That provision was last regularly used during the Great Depression. It is meant to underscore that the central bank should lend to nonbanks only in extreme circumstances. --For Fed officials it was a difficult choice. They did not want to single Bear out for help and they realized their actions aggravated "moral hazard" -- the tendency of bailouts to encourage future risky behavior. But the alternative was potentially far worse. Bear risked defaulting on extensive "repo" loans, in which it pledges securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would see access to repo loans become more restrictive. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices. --By 7 a.m. Friday, the New York Federal Reserve Bank had agreed that it would provide financing to Bear Stearns via J.P. Morgan Chase. J.P. Morgan Chase was used as a conduit because, as a commercial bank, it already has access to the Fed's discount window, is under the Fed's supervisory authority, is Bear's clearing bank and knows Bear well from a previous discussion of a possible strategic tie-up. --Thus, technically the Fed still hasn't lent directly to investment banks. But the central bank has explicitly assumed the risk of the loan. If Bear fails and the collateral it posts is insufficient to cover the loan, the Fed will sustain a loss. Officials say there is no preset maximum amount of the loan, other than how much collateral Bear is able to provide to meet the Fed's requirements. --The role of J.P. Morgan as Bear's savior is somewhat paradoxical, considering the recent tense relationship between the two firms. J.P. Morgan was one of several lenders that played a role in Bear's troubles last summer when J.P. Morgan demanded more collateral from one of Bear's struggling hedge funds. There was a heated conversation between Mr. Black, co-head of J.P. Morgan's investment bank, and Mr. Spector, then Bear's co-president, over Bear's reluctance to bail out the hedge fund. J.P. Morgan ultimately served Bear with a default notice on a loan to Bear. --The role of rescuer has long been part of J.P. Morgan's history. In what's known as the Panic of 1907, a semi-retired J. Pierpont Morgan helped stave off a national financial crisis when he helped to shore up a number of banks that had seen a run on their deposits. --Some 80 years later, the bank played a similar role when it helped organize a government-backed bailout of Chicago's Continental Illinois, a bank sagging under a mountain of bad loans. --J.P. Morgan has been on the prowl for acquisitions. Although it is thought to be most interested in a large regional bank, Bear's assets could be too good, and too cheap, to turn down. --J.P. Morgan might also be interested in buying just Bear's prime brokerage business, a key Wall Street business -- used by hedge funds to borrow money and clear trades -- that J.P. Morgan doesn't now have. The Bear unit has a good reputation but has suffered from a loss of cash balances in recent months. --The immediate capital infusion isn't likely to restore enough confidence in Bear to stop the exodus. --