Fed comes to Bear Stearns' rescue

By Joseph Giannone and Dane Hamilton

NEW YORK (Reuters) - Bear Stearns, slammed by a sudden cash crunch, hammered out an emergency funding deal with the Federal Reserve and JPMorgan Chase, intensifying fears the global credit crisis will claim more victims and driving Bear's shares down by as much as half.

It was the Federal Reserve's first rescue of a broker since the Great Depression and its latest effort to soothe financial markets roiled by fallout from rising mortgage defaults.

The 28-day emergency line of finance on Friday came just two days after Bear, which has been hard-hit by its heavy exposure to the faltering U.S. mortgage market, dismissed market rumours of a cash shortage and said it still was a healthy player in the global web of trading and finance.

But its tune changed Friday. Bear Stearns' chief executive, Alan Schwartz, explaining why the bank turned to the Fed and a rival bank, said: "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 Schwartz.

But inside Bear, the fifth largest U.S. bank, and on Wall Street, the view was grim.

"The mood is somber," said one Bear Stearns equities salesman who declined to be quoted by name for this story. The buzz at the firm was that there could be a takeover deal as soon as Monday, he said.

Investors fled. Bear stock plunged on record volume, closing down 45.9 percent at $30.85 and shearing $3.2 billion (1.5 billion pounds) off its market value. Earlier, the stock fell as low as $28.42, its lowest price since the 1998 Asian debt crisis.