March 14 (Bloomberg) -- Bear Stearns Cos., teetering on the brink of collapse from a lack of cash, got emergency funding from the Federal Reserve and JPMorgan Chase & Co. in the largest government bailout of a U.S. securities firm.

After denying earlier this week that access to capital was at risk, Bear Stearns Chief Executive Officer Alan Schwartz said today that the 85-year-old company's cash position had ``significantly deteriorated'' in the past 24 hours. The central bank agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today.

JPMorgan, led by Chief Executive Officer Jamie Dimon, is considering buying Bear Stearns, among other options, according to three people briefed on the matter. No agreement has been reached and it's possible that no deal will be completed, said the people, who declined be identified because the discussions are confidential. A person close to JPMorgan said the bank may also be interested in buying Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds.

The Fed acted to prevent the failure of the second-biggest underwriter of U.S. mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week. JPMorgan, which has suffered fewer losses than rivals during the credit crisis, may end up owning all or part of Bear Stearns, analysts speculated.

`Market Rumors'

``I don't think they can afford to let Bear go,'' said Charles Geisst, the author of ``100 Years on Wall Street,'' referring to the New York Fed bailout. ``At this particular moment in time, it would be a devastating blow to the markets.''

Bear Stearns, founded in 1923, acted in response to ``market rumors'' of a liquidity crisis, CEO Schwartz, 57, said in a separate statement. He said earlier this week that the company's ``liquidity cushion'' was sufficient to weather the credit-market contraction. Traders have been reluctant to engage in long-term transactions with Bear Stearns as the counterparty, the Wall Street Journal reported yesterday.

``We have tried to confront and dispel these rumors and parse fact from fiction,'' Schwartz, who was named CEO less than three months ago, said in the New York-based company's statement today. ``Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.''

The announcement caused financial shares to plunge, with Bear Stearns tumbling a record 47 percent to $30 at 4 p.m. in New York Stock Exchange composite trading. The stock has lost 66 percent of its value this year.

Hedge Fund Failure

Lehman Brothers Holdings Inc., Citigroup Inc. and Bank of America Corp. also led declines as all 10 industry groups in the Standard & Poor's 500 Index fell. Lehman, the biggest underwriter of U.S. mortgage bonds, said it obtained a $2 billion, three-year credit line from 40 banks.

Bear Stearns's long-term counterparty credit rating was reduced three levels to BBB by Standard & Poor's. The rating may be cut further, New York-based S&P said. It lowered the short- term rating to A3 from A1. Moody's Investors Service also downgraded the company's long-term rating to Baa1 from A2.

Bear Stearns, which first sold shares to the public in 1985, helped trigger a crash in the market for home loans to borrowers with blemished credit histories after two of its hedge funds collapsed in July. The failure of the two funds, which invested in securities linked to subprime mortgages, prompted a sell-off of the assets, which in turn led investors to shun other high-yield debt.

Cayne's Pick

Schwartz, an executive with more than 30 years of experience at Bear Stearns, was the hand-picked choice of his predecessor, James ``Jimmy'' Cayne, 74, who remains non- executive chairman of the firm. Cayne stepped down after reporting an $854 million fourth-quarter loss, the first in the company's history.

On a conference call with analysts and investors after today's announcement, Schwartz said the company's book value was ``fundamentally'' unchanged. Clients have continued to withdraw funds today, he said.

The firm has retained investment bank Lazard Ltd. to seek ``strategic alternatives,'' Schwartz said. Bear Stearns said it's also in talks with New York-based JPMorgan about long-term funding.

Steven Black, JPMorgan's co-head of investment banking, said on Feb. 27 that the bank was considering acquiring a prime brokerage that was for sale then. He didn't name the seller. Bank of America, based in Charlotte, North Carolina, said on Jan. 15 that it planned to sell its prime brokerage.

For Sale

``There happens to be one for sale and we are looking at it,'' Black said at a JPMorgan investor conference in New York.

The Bear Stearns bailout was announced hours before President George W. Bush delivered a speech on the U.S. economic outlook.

``Our economy obviously is going through a tough time,'' Bush said to business and finance leaders at the Economic Club of New York. ``In the long run, I'm confident our economy will continue to grow because the foundation is solid.''

Bear Stearns led Wall Street shares lower this year as the world's largest lenders and securities firms wrote down assets linked to the subprime mortgage market. Analysts in the past month have lowered expectations for earnings in the first quarter. JPMorgan has posted $3.7 billion in writedowns, a fraction of the $22.4 billion reported by Citigroup, the biggest U.S. bank by assets.

Good Pockets

``JPMorgan is not loaded up with bad mortgage debt,'' said Vincent Farrell, principal at Scotsman Capital Management. ``Bear has a couple of very good pockets that any other firm would want to have if you can clear up the balance-sheet issue.''

About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July.

``The future for Bear will be found in a forced marriage,'' said Charles Peabody, an analyst at Portales Partners LLC in New York who rates the stock a ``sell.'' ``Their business model is broken. They don't have the ability to go it alone.''

Joseph Lewis, the second-largest shareholder in Bear Stearns Cos., wasn't planning to reduce his stake, a person close to him said March 11. Lewis, a 71-year-old billionaire, views his 9.4 percent investment as long-term, the person said.

The Fed is taking on the credit risk from collateral supplied by Bear Stearns, which approached the central bank for emergency funds, Fed staff officials said today.

Bernanke's Vote

The Fed, under Chairman Ben S. Bernanke, voted unanimously to lend the funds through JPMorgan because it would be operationally simpler than a direct loan to Bear Stearns, the staff said on condition of anonymity. The regulator invoked a little-used law that allows it to make loans to corporations and private partnerships, which required a Board vote, according to the staffers.

The Fed said it was ``monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system.''

The senior staffers declined to describe how large the loan to Bear Stearns was, and declined to say whether a private- sector bailout was attempted before the Fed extended credit through JPMorgan.

``The issue now is whether Bear Stearns customers will stick around,'' said Bruce Foerster, president of South Beach Capital Markets and a former Wall Street executive. ``Some others have gotten through the same kind of troubles, some ended up being shut down or sold. I'm hoping Bear can get past it.''

JPMorgan's Feather

JPMorgan's participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Geisst, the Wall Street historian.

The bank has also profited from others' crises. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.

``It may be a feather in JPMorgan's cap that they're considered able to do this,'' Geisst said. ``The Fed could have chosen any number of banks to do this, and they chose JPMorgan.''

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: March 14, 2008 19:56 EDT