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Why does Bear Stearns need a government bailout?

It was clear yesterday from the stock price action that The Bear Stearns Companies (NYSE: BSC) was facing some pain. The stock plunged yesterday to a five-year low on liquidity concerns, according to Bloomberg News. Bear rolled out its executives in an attempt to alleviate those concerns.

But today's news of a bailout to ease a liquidity squeeze is a major shock. The Wall Street Journal reports that JPMorgan Chase & Co (NYSE: JPM) and the Federal Reserve Bank of New York are arranging financing for Bear Stearns. Bear's stock is down more than 15% in early trading on the news. And the Dow is down 234 points.

The Journal reports that Bear Stearns CEO Alan Schwartz, in noting the liquidity rumors, said in a separate statement that "amidst this market chatter, 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."

This move raises many questions: How much money is being raised? Why is the Fed getting involved instead of private investors? How bad is the problem really? How much of Schwartz's comments are covering up for a really bad situation? Is this a government bailout for Bear Stearns's bad decisions?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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Last updated: July 04, 2008: 11:50 PM

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