Signup for our free newsletter:

Bear Gets a Bailout, Avoids Extinction

Written By Brian Hicks

Posted March 14, 2008






Wall Street socialism.  Pure and simple.

That’s my take on the massive bailout that the Fed cooked up for Bear Stearns this morning.

Now I know what your going say.

“Steve, you gotta grow up buddy. Bear Stearns is too big to fail”, you’ll moan, “The Fed can’t let that happen.”

And while that is kind of true, it still of makes me sort of wonder what exactly a free market really is. Because let’s face it we don’t really have one here anymore.

Nonetheless, here are the details of the deal that crushed the markets today.

From Bloomberg by Scott and Craig Torres entitled: Fed Invokes Little-Used Authority to Aid Bear Stearns

“Federal Reserve Chairman Ben S. Bernanke invoked a law last used four decades ago to keep Bear Stearns Co. from collapsing after the securities firm approached the central bank for emergency funding.

The loan to Bear Stearns required a vote today by the Fed’s Board of Governors because the company isn’t a bank, Fed staff officials said. The central bank is taking on the credit risk from Bear Stearns collateral, lending the funds through JPMorgan Chase & Co. because it’s operationally simpler to accomplish than a direct loan, the staff said on condition of anonymity.

Bernanke took advantage of little-used parts of Fed law, added in the 1930s and last utilized in the 1960s, that allows it to loan to corporations and private partnerships with a special Board vote. The Fed chief probably sought to stave off a deeper blow to the financial system from a Bear Stearns collapse, former Fed researcher Keith Hembre said.

“The Fed really doesn’t have any obligation to help a non- bank aside from its role or responsibility to keep the financial markets functioning,” said Hembre, who helps oversee $107 billion as chief economist at FAF Advisors Inc. in Minneapolis. “They made a judgment, probably an accurate one, that they’re not going to function very well if you’ve got a full-blown crisis with a major Wall Street firm.”

The Fed said in a statement that it will “continue to provide liquidity as necessary to promote the orderly functioning of the financial system,” repeating reassurances the central bank has made often since credit strains arrived in August. The statement said the Fed Board unanimously approved the arrangement with JPMorgan and Bear Stearns.”


Of course, it was just two days ago that Bear Stearns CEO Alan Schwartz appeared on CNBC telling anyone that would listen that “We don’t see any pressure on our liquidity, let alone a liquidity crisis.” 

Going further he said there was “absolutely no truth” to the speculation that the brokerage firm had liquidity problems.

However, a mere 24 hours later Swartz changed his tune entirely revealing that “our liquidity position in the last 24 hours had significantly deteriorated.” 

Liar. Liar. Liar.

So to end the emergency, the Fed had to offer a non-recourse loan to JP Morgan today to keep Bear from going extinct.

Here’s how it will all work.

According to deal, JP Morgan will be allowed to borrow as much money as it needs to loan to Bear Stearns from the discount window. Simple enough.

However, if Bear Stearns ends up defaulting on those new loans, JP Morgan will be completely off the hook. That’s because the Fed won’t be able to go back to them for repayment. That’s how a non-recourse loan works.

Nice deal huh?

It’s Wall Street socialism. Pure and simple.

And in the end it’s going to cost us all.

The game is rigged and Main Street doesn’t stand a chance.

The thing is the game is far from over.