Company Bond’s Risk Rises following the Bear Stearns Sale

A frantic weekend has seen the conclusion of the Bear Stearns Cos takeover by JPMorgan Chase & Co, and the Federal Reserve made its first emergency weekend rate cut for decades has culminated in an increase cost in protecting corporate debt from default.

In an attempt to prevent a complete financial market meltdown the Federal Reserve has cut the rate on direct loans to banks as well as agreeing to providing as much $30 billion to JPMorgan to help it finance the acquisition of Bear Stearns.

Credit-default swaps on the Markit CDX North America Investment-Grade Index rocketed from 7 basis points to a near-record 197 points today and there is a resounding fear that the credit squeeze will lead to cash shortages amongst other banks who will find themselves in a similar position to Bear Stearns.

The is an air of resilience amongst financial institutions, as espoused by Kaupthing’s chairman, Sigurdur Einarsson who argued against suggestions that banks are suffering a liquidity crisis labeling them as “sheer nonsense” despite the bank only having liquidity for another 440 days.

JPMorgan is set to pay $240 million for Bear Stearns following the Federal Reserve pumping in an estimated $30 million to fund the move. This equates to a 90% loss from its value in just seven days as creditors stopped renewing loans and clients pulled out $17 billion in just two days.

This represents an end to wall streets fifth largest bank, and 85 year history. The real fear according to Anita Yadav head of credit research at UBS AG is that “If Bear Stearns, which has a solid history, has fallen apart, how many of them are there?”

This situation is exacerbated because the Fed took such an alarmist course of action that the markets believe the situation to be worse.

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