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Hyperbole? Maybe.
The former head of monetary policy at the Fed called the agency's action on Bear Stearns (NYSE: BSC) the "worst policy mistake in a generation." To some extent, the comments by Vincent Reinhart reflect his opinion that the Fed did not look at a number of other alternatives for saving the investment bank. According to The Wall Street Journal, "seeking other suitors, removing certain assets from Bear's portfolio or quickly implementing its previously announced offer to temporarily swap Treasury securities for dealers' less liquid assets" were all options.
The comments beg the question of what would have happened to the financial markers if Bear Stearns failed. The answer the Fed gives is that assets of other firms could have been destroyed or at least might have lost some of their value.
Rienhart may have a point. The Fed has made funds available to banks in exchange for paper, some of it with little value, which is, in many cases backed by mortgage-related securities. More recently it has let primary brokers have access to money on a similar basis. That mechanism was not in place when Bear Stearns was sold to JP Morgan (NYSE: JPM) with Fed backing. Reinhart's real question is whether it was necessary to wipe our the investment bank's shareholders in exchange for saving its customers.
The Fed probably did act too fast. How many days would it have taken to ask for other bids for the investment house? Could the Fed have kept Bear afloat during that period? The answer is almost certainly "yes".
Douglas A. McIntyre is an editor at 247wallst.com and writes the Ten Stocks Under $10 Letter.
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Reader Comments (Page 1 of 1)
4-29-2008 @ 10:12AM
CIR said...
I have been following the Bear rescue and the Financial Market reform plan. We attended the SBC hearing. A few things to note:
a. Treasury sounded a little defensive when asked by Senator Jack Reed about the lack of foresight, claiming that no one could have foreseen this crisis.
Actually, we did, in August, 2007:
"Major market institutions are now, as the troubled Bear Stearns reveals, feeling the negative effect of allowing these practices to flourish. Bear Stearns may be in real danger - it's stock decreased in value by 27% over the last month. We do not expect, but would not be surprised if the firm failed, another casualty of arrogance and greed."
See: http://twisri.blogspot.com/2007/08/morgage-gses-predatory-lending-and.html and http://www.sec.gov/comments/s7-16-07/s71607-495.pdf
b. In addition, even the claim that perfect foresight was needed is wrong. With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic. A financially parasitic relationship is defined as (modifications from the standard definition noted):
"a type of symbiotic (financial or economic) relationship..in which one, the parasite, benefits from a prolonged, close association with the other, the host (economy or financial institution), which is harmed. In general, parasites are much smaller than their hosts (investment banks, while large, are smaller than the economy as a whole), show a high degree of specialization for their mode of life (investment banks are highly specialized) and reproduce more quickly and in greater numbers than their hosts (check.)
The harm and benefit in (financial or economic) parasitic interactions concern the fitness of the (economy) involved. Parasites reduce host (financial or economic) fitness in many ways, ranging from general or specialized pathology (such as regulatory nullification), impairment of (economic) characteristics, to the modification of host (economy) behaviour. Parasites increase their fitness by exploiting hosts for money, habitat (HQ location) and (global) dispersal."
c. Despite protestations to the contrary, the rescue was, in fact, a bailout since, as Senator Jim Bunning mentioned, "Bear shareholders did better with the Fed's help than they would have without it." Note: Bailout is defined as: " a situation where a bankrupt or nearly bankrupt entity, such as a corporation or a bank, is given a fresh injection of liquidity, in order to meet its short term obligations. Often bail outs are by governments, or by consortia of investors who demand control over the entity as the price for injecting funds."
d. The $30 billion dollar figure was calculated based on a mark-to-market provided by Bear Stearns.
e. Given (d.) the Fed does not really know the total dollar amount of the liability it accepted.
f. Blackrock was hired as an Investment Advisor to the Fed for purposes of managing and providing advice about the value of the Bear collateral. No competing bids were sought. The contract for Blackrock's services has not been written yet and no cost for these advisory services has been determined. Following hedge fund pricing (2% upfront and 20% of gains) we (the public) could be looking at a minimum fee of $600 million (2% of $30 billion).