Lehman, Citi and debt protection costs jump: Bear Stearns gets emergency cash

Debt protection costs of Bear Stearns, Lehman Brothers and Citibank surged on Friday after Bear received new funding because its liquidity position had "significantly deteriorated." J.P. Morgan Chase & Co said on Friday it, along with the Federal Reserve Bank of New York, agreed to provide secured funding to Bear Stearns, as necessary, for up to 28 days.
The cost to insure Bear Stearns debt with credit default swaps rose to 730 basis points, or $730,000 per year for five years to insure $10 million in debt, after earlier rallying to 530 basis points, according to broker Phoenix Partners Group.
The swaps traded at 685 basis points before announcement of the liquidity injection. Citibank's debt protection costs also jumped around 110 basis points to 240 basis points, while Lehman Brothers' N> swaps surged around 65 basis points to 465 basis points, analysts and brokers said.
The benchmark US investment grade credit derivative index widened to 192 basis points, from 187.62 basis points at Thursday's close, according to Markit Intraday. US investment giant Bear Stearns, citing a potential cash crunch, said Friday it was getting an emergency loan from J.P. Morgan Chase in coordination with the Federal Reserve Bank of New York.
The Wall Street investment bank, which has been battered by the subprime mortgage crisis, said its liquidity position had "significantly deteriorated" in the last 24 hours, forcing it to seek aid. The emergency funding will be available to Bear Stearns "as necessary" for an initial period of up to 28 days, J.P. Morgan said in a separate statement.
Separately, the Federal Reserve pledged "to provide liquidity as necessary" to the financial system as it said its board unanimously had approved the emergency funding arrangement for Bear Stearns. The Fed announcement came amid growing concerns about a liquidity crunch in the financial industry that is stuck with mortgage-backed securities in a market that is frozen because of the meltdown in US real estate.
The US central bank last week announced a new program that would allow some brokerages as well as banks to swap their mortgage securities for US Treasury bonds to help unblock the market. But that program will not start until March 27.
J.P. Morgan Chase said the New York Fed, through its discount window, would provide it with the financing for the Bear Stearns funding, adding it did not believe this transaction exposed its shareholders to "any material risk."
J.P. Morgan Chase said it was working closely with Bear Stearns on securing permanent financing or "other alternatives" for the Wall Street investment bank, which has been battered by a global credit crunch and the US housing slump.