After some hints late last week about a Fed bailout, yesterday JP Morgan bought Bear Stearns for two bucks a share after being given a $30 billion credit line/insurance policy by the Federal Reserve.
In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk. ... The Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed.
Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages. But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed.
The New York Times describes the late Sunday deal as a real shock to the Street. This morning the Nikkei, taking this as a very, very bad sign for markets, lost 450 points according to early reports.
In the United States, investors faced another week of gut-wrenching volatility in American markets.
Despite the sale of Bear, investors fear that others in the industry, like Lehman Brothers, already reeling from losses on mortgage-related investments, could face further blows.
The deal for Bear, done at the behest of the Fed and the Treasury Department, punctuates the stunning downfall of one of Wall Street’s biggest and most storied firms. Bear had weathered the vagaries of the markets for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now afflicting the American economy. ...
... Wall Street was stunned by the news on Sunday night. “This is like waking up in summer with snow on the ground,” said Ron Geffner, a partner Sadis & Goldberg and a former enforcement lawyer for the Securities and Exchange Commission. “The price is indicative that there were bigger problems at Bear than clients and the public realized.”
US market futures are dropping "sharply."
We talked to a friend yesterday who believes (disapprovingly) that it's the homeowners, conned into what should have been illegal mortgages, who are getting bailed out. But this bailout -- these huge outlays of federal funds (taxpayers' money)-- are not going to people who have lost their homes. It's going to the companies that cheated and misled the homeowners. They conned homebuyers and they conned themselves. Paul Krugman asks: "Here’s the question we really should be asking: When the feds do bail out the financial system, what will they do to ensure that they aren’t also bailing out the people who got us into this mess?" He writes:
Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”
Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.
Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.
But the Fed rode to Bear’s rescue anyway, fearing that the collapse of a major investment bank would cause panic in the markets and wreak havoc with the wider economy. Fed officials knew that they were doing a bad thing, but believed that the alternative would be even worse.
As Bear goes, so will go the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money.
A huge amount of money. Ours. The irony is that those dispossessed homeowners' tax payments are part of what's making it possible for the firms that conned them to stay in their Wall Street homes.
That must cheer up the homeless, right?
