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The Second Domino in Sub Prime- Bear Stearns

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The biggest news over the weekend was the rescue of Bear Stearns by the Federal Reserve and JP Morgan. Bear Stearns is the fifth largest Securities firm in the US and has a large mortgage securities business that became embroiled in the sub-prime mortgage contagion.

The rescue package involves JP Morgan guarantee the liquidity of Bear Stearns for another 4 weeks with the help of the Federal Reserve Bank. This was the Federal Reserve first rescue of a securities firm since the Great Depression. This action allows the liquidity hit firm to seek for a buyer or someone in the finance world to merge with it and provide it with the liquidity to continue operations.

This action by the Federal Reserve mirrors the action taken by the British Central Bank in bailing out and nationalising Northern Rock after a bank run there. The Northern Rock saga started because of fears over the sub-prime crisis also because the contagion has spread worldwide as banks and financial institutions all took a bite at the sub-prime loan. So a bank has fallen in UK in the first domino and a huge Securities firm in USA is the second.

When the Asian Currencies Crisis started, it spread through the whole of Asia and afflicted quite a few economies before the wave of speculators were stopped at Hong Kong where the bow tied Financial Secretary, Donald Tsang, utilised his country's reserves to stem the tide. Battling against the wave of currency speculators with Hong Kong reserves and probably help from China's Zhu Rongji.

Bailing out of financial institutions in USA could be seen by commentators in the country as something that a free economy will do, preferring to let the financial institution die a natural death. However, the whole financial edifice could come crashing down if the fingers of the Federal Reserve does not plug into the holes in the dike. Also the country and the world needs the likes of a John Pierpont Morgan who prevented a early panic in 1907 or a Donald Tsang to do what is necessary to calm the markets.

We are entering a dangerous period, the next few weeks could see the financial markets plummet as news of this sinks in and the analysts make their projections and forecast.

Banks should declare all their sub-prime exposure to clear uncertainty in the markets and prevent liquidity from drying up as they are fearing one another and do not dare to loan to another institution which could be deeply mired in this sub-prime crisis and become embroiled in it.

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