one sane person

Investment Bank Regulation: Beware the Dawn of This New Era

When will this insanity stop. "Moral Hazard," "Bailouts," Fed conspiracy theories. When will people stop believing everything they read in newspapers. Let me try to point a few things out that have an actual basis in facts and not sensationalist headlines.
1) Bear came to the Fed not the other way around. Bear was facing a run on the bank, which almost by definition cannot be stopped other than a step-in by a bigger entity guaranteeing its counterparty obligations. If the Fed opened the discount window to Bear, the run on the bank would not stop short of an explicit bailout, which precisely what the Fed wanted to avoid and did. Remember Bear burned through 17Bn in liquidity in 4 days, just access to cash would not help its situation.
2) To avoid this bailout and any of these "moral hazard" problems JPM and potentially a few others were encouraged to bid for Bear. JPM was the only one who had the balance sheet and the wherewithal to do so.
3) The tax payers are not on the hook for anything! I repeat the tax payers are not in any way affected by the 29Bn of special financing that the Fed has provided to JPM. For all we know not all of this money is even going to be used. This is a lending facility, and a complex one at that, structured as a swap between treasury securities (the only form Fed's liquidity takes) and certain illiquid mortgage and asset-backed securities which appear on Bear's balance sheet. And btw these securities have been marked dramatically below par as a result of 3 quarters worth of markdowns Bear has already taken.
4) In the modern financial era of BASEL 1 & 2 the Investment Banks' balance sheets are already so regulated that quite frankly it can hardly get any worse. RegCap charges for Banks' trading books are enormous. In fact in the current regulatory framework Investment Banks are at a massive disadvantage relative to Commercial Banks, which have access to very cheap funding via their M1 deposits, Fed discount window (no longer only the case for commercial banks), and better lending terms from other banks. One of the reasons Bear was levered 30-1 is because for an Investment Bank to conduct normal business operations it needs to have a high degree of capital, whether liquid or illiquid--it needs it bottom line. Trading, lending, underwriting all require an historically unprecedented amounts of capital to compete in the Investment Banking arena.
5) Do not delude yourself that commercial banks take on less risk. Trading and prop books of guys like JPM, BAC, CSFB, and Deutsche, dwarf their Investment Banking counterparts. Commercial Banking Conglomerates take on enormous risk, and not only through their broker-dealer arms, commercial lending and underwriting is just as risky in the current environment as Goldman-style prop trading. True Goldman's VaR historically is much higher than competition, but that depends more on their scope and volume of investments, than the asset classes they invest in. In an environment that we are in right now, all risky assets have a near 1 correlation with each other.

Bottom line, the Fed did what it had to do in order to maintain stability and liquidity in the financial system. It is in fact a lender of last resort to the entire financial system and has to be one as mandated by its charter-this is not a current development btw. The senators may investigate these moves by the Fed all they want, their goal isn't to get justice for the U.S. taxpayer, who so far is benefiting from the Fed's moves, but rather to get their names in the various news stories describing these developments.