Bear Bailout

Washington     Mark the date. The party is really and truly finally over on Wall Street, and it’s all about cleaning up now.

I’m in DC for some meetings and other business coinciding with the Take Back America Conference, but here at the Shoreham everything overheard at breakfast were the shocked whispers of how Bear Stearns could have sold for $2 per share when valued at $70 per share only one week ago. That is the fire sale story, but the real story is that this is a $30 Billion federal bailout and subsidy to JP Morgan Chase to pick up after the mess and run the salvage operation with a grin on their faces. Chase picks up Bear for less than $250 M which is chump these days especially when some analysts say that the Bear building in Manhattan alone is worth $8 per share or over $1 Billion!

But the real story is that the Federal Reserve in an almost unprecedented move is paying for the bailout by guaranteeing $30 Billion in Reserve credit against exposed liabilities at Bear, so that they don’t boomerang on Chase. This is not a Congressional bailout like the savings and loans debacle some years ago, but a “money printing” operation of sorts where the Federal Reserve pools up $300 Billion last week to create a “virtual” bank that can facilitate credit and borrowing for large institutions and assure liquidity and now stands against the risk on Bear Stearns to prevent bankruptcy.

Why?

At one level this is so far over my head that I could say, “who knows?” and have an equal chance of hitting the mark, but it seems that whether or not they are saying this clearly, that there is a wholesale panic happening on Wall Street and the Federal Reserve is doing anything and everything it can imagine to prevent a wholesale “bank run” that once out of control could spiral into full scale disaster. The problem is that nothing that they have done so far (and they have done plenty) seems to have stabilized the credit markets to date.

So, will this work? Who knows!

Is there a limit to how far the Federal Reserve will go? There seems not to be. And, maybe this is the right course in order to prevent a total crash and the pain that spreads with it, even though it is galling to see these big money guys still walk away with millions for all of their mess.

Other shoes are bound to fall, even if the Federal Reserve is committed to picking them up.

The price of this bailout may yet exceed the savings and loans.

Bear Stearns world headquarters in NY
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