The Fed Keeps Tinkering

Concern about credit crisis leads Fed to make rare weekend move
By JEANNINE AVERSA

AP Economics Writer

WASHINGTON (AP) -- Worry about the damage a growing credit crisis is inflicting on an ailing U.S. economy led the Federal Reserve to make a rare weekend move, lowering a key lending rate before Wall Street opened Monday.

The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans. The new lending facility will be available to Wall Street firms on Monday.

"These steps will provide financial institutions with greater assurance of access to funds,'' Federal Reserve Chairman Ben Bernanke told reporters in a brief conference call Sunday evening.

The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world's largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.

"It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown,'' Richard Yamarone, an economist at Argus Research, said Sunday evening.

However on world financial markets, Asian stocks plunged early Monday after the JPMorgan and Fed announcements. Markets in Australia and New Zealand were also off.

Oil prices hit a record in Asian trading as the value of the dollar continued its free fall and U.S. stock index futures were down sharply, suggesting Wall Street would open lower after sinking Friday.

"There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted,'' said Atsuji Ohara, global strategist of Shinko Securities in Tokyo.

President Bush has scheduled a White House meeting Monday afternoon with his Working Group on Financial Markets, which includes Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.

Stephanie wrote:

The Fed acted just after JPMorgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world's largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JPMorgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.

"It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown,'' Richard Yamarone, an economist at Argus Research, said Sunday evening.

JPMorgan will exchange 0.5473 of its shares for one share of Bear Stearns. It values Bear at just $236 million, compared to Bear’s Friday market capitalization of $3.54 billion.

The deal is expected to close in the next 90 days, and is subject only to shareholder approval, which both banks expect to happen.

"JPMorgan Chase stands behind Bear Stearns," said JPMorgan Chief Executive Jamie Dimon in a press release Sunday. "Bear Stearns' clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns' counterparty risk."

Bear's shares traded at more than $150 less than a year ago. The deal places Bear's stock at a 93% discount to Friday's close.

One of the biggest losers in this deal might be British billionaire Joseph Lewis, who currently owns a 9.6% stake in Bear. In just a few months Lewis lost close to $800 million.

The news raced through the global financial markets Sunday night. Japan's Nikkei fell more than 3% in early trading. U.S stock future plunged on the news, with Dow Jones Industrial Average futures falling more than 190 points as of 9:40 p.m. EST in New York.

To finance the deal, the Federal Reserve approved up to $30 billion in special financing to help JPMorgan work through Bears illiquid assets, mostly complicated investments backed by subprime mortgages.

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The check will soon be in the mail.

The IRS announced Monday that starting May 2, it will begin mailing more than 130 million economic stimulus checks. The IRS expects the first round of payments to be completed in early July.

With fears of a recession reverberating through the markets, the government approved a $168 billion stimulus plan that gives single filers up to $600 and married couples filing jointly up to $1,200. In addition, parents will get $300 for each child. Single filers making more than $75,000 and married coupled making more than $150,000 will see their rebates reduced. The plan is designed to boost the economy by getting consumers spending again.

According to the IRS, to help tax payers figure out how much they are entitled to, a new online calculator is available at www.irs.gov. Payments will be made via direct deposit for those that choose to receive their 2007 income tax refund through direct deposit. Everyone else will get their payment in the form of a paper check.

“To receive an economic stimulus payment, people just need to file their tax returns as they usually do," said Linda E. Stiff, IRS acting commissioner, in a press release. “The payment will be automatic for the vast majority of taxpayers. Some lower-income workers and recipients of certain Social Security and veterans benefits who don’t normally need to file a tax return will need to do so in order to receive a stimulus payment.”

The IRS plans to send out the payments in order of the last two digits of the Social Security number used on the tax return, which means taxpayers could receive their checks at different times than family members and neighbors. The IRS is aiming to make about 34 million payments or more than 25% in the first three weeks of the payment schedule. For people who use direct deposit, their stimulus payments should come in between May 2 and May 16 if their tax returns were received and processed by April 15.

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