More Moral Hazard: Now, Watch Bear And JP Morgan Play the Fed
A week ago, Bear Stearns (BSC) was about to declare bankruptcy, which would have sent its stock to zero. At the 11th hour, JP Morgan (JPM) agreed to buy Bear for $2, a price reportedly mandated by the Fed so the Fed wouldn't be accused of funding a "bailout" (and a price enjoyed by JP Morgan and agreed to by Bear because it was better than zero). But of course the Fed was accused of funding a bailout anyway, because the only way JP Morgan agreed to move forward was the Fed's $30 billion no-questions-asked guarantee of whatever crap Bear has piled on its balance sheet. Meanwhile, instead of thanking the Fed and JP Morgan for at least saving them something, Bear Stearns shareholders were outraged that JP Morgan was absconding with the firm at a "derisory" price, and JP Morgan CEO Jamie Dimon was trashed as a heartless bastard. Bear's stock traded to $6, on the assumption that Dimon would be forced to raise the price. Etc.
And now, according to the New York Times, JP Morgan and Bear Stearns want to raise the price to $10, at which level Bear Stearns' board will authorize an immediate sale of 40% of the company to JP Morgan (under Delaware law it can do this without a shareholder vote). This will leave JP Morgan needing only slightly more than 10% of the shareholder vote to get the deal done, and Bear's board members own 5%.
What is preventing this simple price adjustment from taking place? The Fed, says Andrew Ross Sorkin at the New York Times.
What is the Fed thinking? Probably this:
A week ago, we saved the financial system by orchestrating a Bear Stearns bailout in which Bear shareholders got basically nothing--and we were still accused of a "bailout." If we hadn't intervened, Bear Stearns shareholders would have gotten nothing--zilch--but now that we've let them live, they're demanding more. If we cave, we'll set another awful precedent: Not only do we now look like we'll rush to the aid of any rich Wall Street firm in need, we'll let Wall Street use us however it pleases. We can't let that happen!
But the Bear-JP Morgan contingent was of course smart enough to leak this news to the NYT--so now it's the Fed who looks like a bunch of heartless bastards. And when the Fed caves--perhaps later today--it will come under a new round of fire for saving Wall Street fat cats and the expense of the little guy. And the nation's homeowners, who are also underwater, will clamor ever louder for their own bailout. And so on...
Over the past week, Wall Street has been showering praise on Bernanke & Co for "saving the financial system." A bank the size of Bear Stearns couldn't have been allowed to fail, the story goes, or the world would have ended. Of course, everyone said the same thing when Enron, Drexel, and a bunch of other too-big-to-fail firms failed. And last time we checked, the world's still here.
See Also:
SEC Saves Bear Stearns Alan Schwartz--Not a Liar!
Bear Stearns to Fire Up to 7,000
AND THE BIGGER FOOLS THE GOV ANWERS THEM WITH "Here ya go"
losers are the taxpayers
winners are the socialist
enjoy your downfall America
Obama is right, my white brothers haven't done anything for me nor will they. Where are the auditors? They threw Martha Stewart in jail, now go get the other fat cats and put an end to this cycle.
In theory, the Fed is only permitted to lend money to commericial banks, not investment banks. Commercial banks are less risky because they submit to supervision & regulation. One of those regulations is a requirement to maintain a certain amount of money in reserve. The Fed will loan them money in "overnight" operations, to temporarily help them meet their reserve requirements.
In contrast, investment banks are not regulated — at least, not to the same degree as commercial banks. One result of the un-regulated status is that investment banks don't have the same reserve requirement. But as a result of reduced regulation, investment banks are not entitled to the benefits that regulated commercial banks enjoy. The Fed's most recent action, however, gives un-regulated investment banks a benefit previously afforded only to regulated commercial banks. Investment banks are receiving benefits, without responsibility.
Below is an article from financial analyst Karl Denninger on this subject.
http://market-ticker.denninger.net/2008/03/articles-of-impeachment-bear-stearns.html
Sunday, March 23, 2008
Articles of Impeachment? Bear Stearns Buyout Illegal?
"On or about March 16th, 2008, George W. Bush, both personally and through his Treasury Secretary Henry Paulson, caused to be provided to JP Morgan/Chase a bribe(1) ultimately flowing from the United States Treasury in an amount not to exceed $30 billion dollars US, via The Federal Reserve, in order to induce JP Morgan/Chase to assume the liabilities and assets of Bear Stearns and Company at a price not determined in the free market or via public bidding, in violation of the limitations expressly set forth in The Federal Reserve Act of 1913, 12 USC Ch 6."
(1) Bribery is defined by Black's Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or other person in discharge of a public or legal duty.
I have spent a solid week both reading The Federal Reserve Act of 1913 and thinking about the circumstances of this transaction trying to find a means under which "backstopping" Bear Stearns debt via The Federal Reserve is legally permissible.
Despite my best efforts I can't find explicit or implicit authorization for "a put", as differentiated from a loan, anywhere in The Federal Reserve Act. You can call something whatever you'd like but if in point of fact there is no recourse then it is not a "loan" at all; it is a "PUT" or a "conditional payment", and under The Federal Reserve Act such an action appears to these eyes to be a direct violation of the law.
It is widely reported that both Hank Paulson and George Bush personally "signed off on" The Bear Stearns "bailout" last Sunday. As such their direct and indirect actions, in my view, constitute a "High Crime and Misdemeanor" within the meaning of the United States Constitution and therefore subject George W. Bush to impeachment proceedings as proposed in the above sample article for same.
By the way, I'm not the only one who thinks this is an illegal transaction. John Hussman, of The Hussman Funds, has this to say in a letter with a publication date of tomorrow, March 24th:
"In my view, the deal would be palatable if J.P. Morgan was to remain fully responsible for any losses on the 'collateral' provided to the Federal Reserve, assuming shareholders were to consent to the buyout. As it stands, Congress should quickly step in to bust the existing deal and demand an alternate resolution, by clearly insisting that the Fed's action was not legal.
The Fed did not act to save a bank, but to enrich one. Congress has the power to appropriate resources for such a deal by the representative will of the people – the Fed does not, even under Depression era banking laws. The 'loan' falls outside of Section 13-3 of the Federal Reserve Act, because it is not in fact a loan to either Bear Stearns or J.P. Morgan. Bear Stearns is no longer a business entity under this agreement. And if the fiction that this is a 'loan' to J.P. Morgan was true, then the only point at which the 'collateral' would become an issue would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal."
Finally, it appears that even the SEC Chairman, Christopher Cox, isn't sure that Bear was "done"; that is, this entire transaction might smell like dead fish:
"In what is likely to be a bit of a blockbuster, SEC chairman Christopher Cox sent a letter to Swiss regulators indicating the Bear Stearns (NYSE:BSC) did not have to go the way of all flesh. According to The New York Post "the fate of Bear Stearns was a lack of confidence, not a lack of capital," Cox, the head of the Securities and Exchange Commission, wrote in a five-page letter sent to a Swiss regulator.""
So there you have it.
Now, the question is, do our Congressfolk have the necessary will to stop this raiding of the public treasury for the enrichment of a private firm - if necessary, by bringing the above article of impeachment?
If you think they should, then I have a solution for you."