Bear Stearns shares plummet as it seeks emergency funding

The future of the Wall Street investment bank Bear Stearns is hanging in the balance after the firm was forced to ask the US Federal Reserve for an emergency injection of cash to cope with a liquidity crisis.

Bear Stearns revealed today that its financial position had "significantly deteriorated" in the last 24 hours. The Fed stepped in by arranging for a rival bank, JP Morgan Chase, to provide short-term capital.

Founded in 1923, Bear Stearns employs more than 14,000 people including a significant presence in London's Docklands. But its speciality in credit products such as mortgage-backed securities left it struggling to cope with last year's crisis in American sub-prime homeloans.

Just two days ago, Bear Stearns vehemently denied Wall Street rumours that its liquidity was deteriorating. But today, Bear Stearns' chief executive Alan Schwartz suggested that unjustified speculation had damaged confidence in the firm.

"Bear Stearns has been the subject of a multitude of market rumours regarding our liquidity," said Schwartz. "We have tried to confront and dispel these rumours and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position over the last 24 hours had significantly deteriorated."

Acknowledging that the situation threatened Bear Stearns' ability to stay in business, Schwartz continued: "We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."

On the New York Stock Exchange, Bear's shares dived by 50% to $28.59. Among the biggest investors in the bank is the British-born billionaire Joe Lewis, who bought a stake of 8% in September and is now sitting on losses estimated at $750m (£375m).

JP Morgan's aid is guaranteed by the Fed and will initially last for 28 days. In a statement, JP Morgan said it was working closely with Bear Stearns on securing permanent financing or "other alternatives for the company". This was widely interpreted as meaning that a takeover was a possibility.

The Fed has no statutory obligation to prop up Wall Street banks. But the central bank is understood to be nervous about the inter-linked nature of instruments such as credit default swaps which are traded between big financial institutions. Experts fear that the failure of one big bank could have a knock-on effect which reverberates around the financial system.

The announcement sent the Dow Jones industrial average sharply into negative territory. The blue-chip index was down more than 300 points at one point. By 6.30pm it was still 245 points lower on the day at 11,900. The FTSE also lost its earlier gains to close down 60.7 points at 5,631.7.