Bear Stearns – The End of the Beginning, and a Preview of the Ending

I had a few posts in the past few weeks noting that whatever terms were announced for the Bear Stearns deal (and related deals), it was irrelevant, because in the end, the taxpayer would be footing the bill. The Fed’s M.O. so far has been to announce a little bit of help, then to announce a little bit more, and so forth. In the end, what it comes down to is this: someone is going to have to pay, and that someone will be the taxpayer.

Which leads to this Calculated Risk post that I’m going to just go ahead and steal whole:

Treasury Agrees to Absorb any Losses to the Fed from Bear Stearns

Video from CNBC (hat tip idoc)

CNBC’s Steve Liesman reports on a letter from Treasury Secretary Paulson to New York Fed President Tim Geithner. In the letter, Treasury agrees that the Fed can bill Treasury for any losses from the Bear Stearns deal.

We’re not quite at the end-state yet. We have JPM paying $2 and now $10 a share for BS, we have the Fed agreeing to take on at least a big portion of the losses that JPM might suffer for that purchase, and now we have the Treasury promising to take on a big part of the losses the Fed might suffer for that deal. In nine months, the circle closes, and we’ll start to find about the size of those losses, which in turn will depend on the magnitude of BS’ obligations. (As I noted many times, my expectation, based on cynicism alone, is that they’re negative.) By then, the story will be off the front page, Paulson won’t be at the Treasury, Jim Cayne will have a few hundred million more in the bank, and folks like Kudlow and Cramer will be telling us how things are going to go to pot if the new President raises taxes to pay for the GW-sized hole in the nation’s balance sheet or tries to regulate banks to ensure this kind of thing won’t happen again.

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Update… Title originally contained a mis-spelling.