JP Morgan Chase & Co and the Federal Reserve Bank of New York this afternoon agreed to provide emergency financing to Bear Stearns.
"Our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations," said Bear Stearns Chief Executive Alan Schwartz.
Bear Stearns shares fell nearly 40 per cent after the news of the financing, the latest in the Fed's efforts to soothe financial markets that are increasingly fearful.
Bear Stearns, the fifth-largest US investment bank, has more exposure to the US bond markets than its competitors and has a large mortgage-backed securities business.
The Wall Street Journalreported on Thursday that some clients are increasingly reluctant to trade with Bear Stearns, and that hedge funds are moving assets away from the investment bank's prime brokerage.
The Fed, through its discount window, will provide non-recourse, back-to-back financing to JPMorgan Chase, the commercial bank said. JPMorgan said it does not believe this transaction exposes its shareholders to any material risk.
JPMorgan Chase also said it is working with Bear Stearns on securing permanent financing or other alternatives for the company.
Standard & Poor's said yesterday that subprime mortgage-related write-downs are likely more than halfway done, but more write-downs in other areas - including prime mortgages - are still possible.