Explaining the Bear Stearns Rescue

Tim Geithner has shed some small amount of light today on exactly what the assets are that the Fed is financing as part of JP Morgan's acquisition of Bear Stearns. He doesn't give a detailed breakdown: since BlackRock is in the process of (very) slowly liquidating those assets, it makes sense for the list to be kept reasonably confidential. But this was interesting to me:

The assets were reviewed by the Federal Reserve and its advisor, BlackRock Financial Management. The assets were not individually selected by JPMorgan Chase or Bear Stearns.

In other words, this is not $30 billion of nuclear waste that JP Morgan specifically did not want on its balance sheet. Instead, it was simply a question of there being too much in the way of Bear Stearns assets for JP Morgan to comfortably absorb them all over the course of a single weekend. Here's Geithner's Congressional testimony:

On Sunday morning, executives at JPMorgan Chase informed us that they had become significantly more concerned about the scale of the risk that Bear and its many affiliates had assumed. They were also concerned about the ability of JPMorgan Chase to absorb some of Bear's trading portfolio, particularly given the uncertainty ahead about the ultimate scale of losses facing the financial system.

The key phrase here is "the scale of the risk" - we're talking quantity of assets, more than level of impairment.

In general, I'm impressed by Geithner's testimony: while he necessarily elides quite a lot of the nitty-gritty, he makes the big themes clear and reasonably compelling. If this was a bailout, it was a bailout of the entire financial system more than it was of Bear Stearns in particular. And that is precisely what the Federal Reserve in general, and the New York Fed in particular, was designed to do.

Comments

[Desperate.:]

If they let the public actually SEE what these assets were, i'd believe him, otherwise there's no reason to think it's any more than just hollow statements to try to make everyone feel good again.

2008 Apr 03 02:51 PM

[HangingOnBy...:]

The government has now put itself in a position to have to prop up home prices due to the risky assets now on it's books. It will undoubtedly let the air out slowly. While this has a positive side for the economy, it also means that home buyers will not get affordable home prices anytime soon and in fact will be purchasing a declining asset. Buyer beware if you were considering your new purchase an investment. Also, was laughable to hear Jamie Dimon of JP Morgan say that bankers will be taking a loss if mortgages are written down. That loss is negligible to the loss from the declining value of CDO's. They made a lot of money going up, and are now getting bailed out as they sell off assets prop'd up by the action Congress is surely to take.

2008 Apr 03 03:12 PM

[HangingOnBy...:]

On second thought, I'd suspect JP Morgan will make a tremendous amount of money now that those CDOs will be revalued based on taxpayers dollars.

2008 Apr 03 03:24 PM

[Egg:]

My biggest complaint about the "bailout" was why the Bear Stearns execs (and the rest of the shareholders) got $10 per share from the government while all the rest of the companies that go bankrupt are left with nada.

I'm sure the airlines' (Delta, UAL, et al) shareholders would have appreciated $10 per share from the government after 9/11 related bankruptcies. Heck, even the $2 would have been nice...but they got nothing.

As will in the future any shareholders of non-banking (Big Banks) companies that may go bankrupt.

2008 Apr 03 08:43 PM

[helplessobs...:]

Observers regardless of their opinions on the testimony, have to be impressid with Tim Geithner. If you choose to run up against him you had better have your act together with sound arguments for your premise. Perhaps we have seen a future Fed Chief.

2008 Apr 03 10:38 PM

[BSCLoser:]

How can one ever believe Wall Street after the BSC debacle? CEO Schwartz was on CNBC reassuring the public by vouching for the liquidity of Bear and at the same time desperately looking for a bailout. The book value of the stock was $80 to $100 depending upon the source. Goldman and JP Morgan allegedly had a hand in the undoing of Bear. The employees and shareholders had no warning and were caught up in one of Wall Streets biggest robberies. Shame on those responsible, they should go to jail!

2008 Apr 04 01:51 AM

[ReformerRay:]

Ok - In an emergency, you patch things together.

However, after the emergency, you look back and make things more fair.

For example, all the money the Federal Reserve Board is making available to depository institutions comes with no haircut for the securities accepted by FRB. Why is that?

FRB should adopt a new rule, as soon as the emergency is over, to provide funds at a discount relative to the face value of the securities. In fact, this rule should be applied retroactively.

The Fed is pumping too much liquidity too fast into a system that is not working because of uncertainity. This uncertainity will not be relieved until the extent of non-payment of mortgages becomes clear. That will take years.

Allow asset values to contract. Look to the future rather than to the next week.

2008 Apr 04 05:10 PM