Bear Stearns: The NY Fed Speaks
Here’s some information provided by the Federal Reserve Bank of NY about the Bear Stearns bailout:
The $29 billion credit extension is supported by assets that were valued at $30 billion by Bear Stearns, which valued the assets at market value on March 14.
Oh, come on. If someone other than Bear Stearns was willing to value those assets at $30 billion, would the Fed have had to step in? FWIW, the Fed should be aware I’ve got all sorts of assets lying around the house that I’d be happy to let the Fed take off my hands for what I valued them on March 14. Heck, I’d be willing to let the Fed have them at a 10% discount off the value I claim to place on them. In fact, in the cactus abode, we’re all in it together – the cat is depositing something in the litter box as I type that I’ll throw in for free.
JPMorgan Chase will extend a subordinated loan for $1 billion that will absorb losses, if any, on the sale of these assets before the Federal Reserve.
In theory, this means that at least right now, JPM has some skin in the game. In practice… well, if it happens that JPM does lose money on this, what’s to prevent another announcement by the Fed just like this one, but with the funds going to bail out JPM, or whatever entity gets created to hold JPM’s toxic waste? (Paulson’s guarantee that the Treasury would make up the Fed’s losses just add to that likelihood.)
The reason to give us at least the illusion that JPM might actually lose money on this is to ensure that if things go well, JPM will be the one to make the money, not the Fed which even on paper is taking up the bulk (29/30ths) of the risk. Which raises the question I (and others) have asked over and over… if the bailout of Bear Stearns really was necessary and worth breaking all sorts of precedents to achieve, then why didn’t the Fed just take over Bear Stearns directly, sit on it until things got better, and then sold it off piece by piece? Its hard to see how the Fed’s risk would be all that much greater, but its easy to see how the potential benefit to the taxpayer would be.
Update… In comments, some readers object to the idea of the Fed owning Bear Stearns. Well, here’s another option… given that the Fed has assumed most of the risk but little of the potential upside of BS’ most toxic securities, why didn’t it simply buy those outright? The risk would have been essentially the same, but the profits, should there be any, would then accrue to the Fed, not JPM. Even assuming the goal was to ensure that those bonds in particular didn’t go belly-up, there were ways of doing it that were a lot a less of a giveaway to JPM.
Update 2… Yves Smith at Naked Capitalism has a post on the Bear Stearns hearings before Congress yesterday.
And here’s a line from Ken Houghton which sums it all up:
Congress has ready access to Wall Street bailout advocates. It’s only on vacation that they speak with the people who elect them.