Fed rescue of Bear Stearns raises specter of Depression-era crash

This mechanism was used because only commercial banks, so-called depository institutions, can borrow directly from the Fed’s discount window. Bear Stearns is not a depository bank, and hence the Fed was obliged to invoke a provision of the 1932 amendment to the Federal Reserve Act that applies when “unusual and exigent circumstances exist and the borrower is unable to secure adequate credit accommodations from other sources.”

The announcement of the Fed bailout sent shivers through Wall Street and shook financial markets around the world. It confirmed rumors that had been mounting over the past week that Bear Stearns, the second largest US underwriter of mortgage bonds, did not have the cash to meet claims by its creditors. The rescue operation came one day after the collapse of Carlyle Capital Corporation, a $22 billion publicly traded investment fund controlled by the Carlyle Group, long one of the most profitable and well-connected private equity firms in the US.