Why Won't the Fed Allow Free-Market Bidding for Bear?

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Includes: BSC, JPM
by: JJ Hornblass

Everyone loves gifts, but yesterday JPMorgan Chase & Co. (NYSE:JPM) must have been enjoying its gift from the Federal Reserve Board with particular affection.

The Fed has, for some reason, shown its love of JPM by handing Bear Stearns Companies Inc. (NYSE:BSC) to the commercial bank. But every taxpayer should demand the Fed to explain why it has seemingly not allowed market economics to dictate Bear’s final purchase price.

Let’s first get one thing straight: the Fed has become an asset manager. It has taken over $29 billion of supposedly snarky Bear assets (no one really knows what those assets are) and will manage them via BlackRock. Can you say, "two and twenty"?

It is understandable that the Fed has taken control of these assets: The financial markets are in distress; Bear was effectively bankrupt; a deal that would maintain order in the financial markets required someone to take over the assets; the Fed’s purpose is to maintain order in the financial markets. I get it.

But what I don’t get is why the Fed has effectively precluded any other company -- in the U.S. or globally -- from bidding on Bear. Why? Because the takeover of $29 billion of assets is being done if and only if JPM is Bear’s acquirer. Why? Why won’t the Fed offer this arrangement to another potential buyer? Perhaps that buyer would take a $2 billion subordinated position to the Fed, rather than JPM’s $1 billion? Perhaps another suitor would up the cash component of the takeover deal?

The Fed has been anything but open about this deal. Andrew Ross Sorkin’s article in yesterday’s New York Times is a wonderful account of Ben Bernanke’s role in the deal. It also implies that the Fed in some way wanted Bear to be taken out. That may have been a logical approach when the company was effectively bankrupt and before the Fed began collateralizing distressed mortgage securities, but Bear was trading north of $11 a share yesterday. The Fed’s statement on the revised JPM-Bear deal is clear; its offer to take on $29 billion of assets is to JPM only. Free markets operate best for a reason. The Fed should at least explain why it has decided to ditch free-market bidding for Bear Stearns.