Somehow, these rescue operations never seem to end lately:
Fed Invokes Little-Used Authority to Aid Bear Stearns (Update4)
By Scott Lanman
March 14 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke
invoked a law last used four decades ago to keep Bear Stearns Cos.
from collapsing after the securities firm sought emergency funding
from the central bank.
The loan to Bear Stearns required a vote today by the Fed's Board of
Governors because the company isn't a bank, Fed staff officials said.
The central bank is taking on the credit risk from Bear Stearns
collateral, lending the funds through JPMorgan Chase & Co. because
it's operationally simpler to accomplish than a direct loan, the staff
said on condition of anonymity.
Bernanke took advantage of little-used parts of Fed law, added in the
1930s and last utilized in the 1960s, that allow it to lend to
cor****ations and private partner****ps with a special board vote. The
Fed chief probably sought to stave off a deeper blow to the financial
system from a Bear Stearns collapse, former Fed researcher Keith
Hembre said.
``The Fed really doesn't have any obligation to help a non- bank aside
from its role or responsibility to keep the financial markets
functioning,'' said Hembre, who helps oversee $107 billion as chief
economist at FAF Advisors Inc. in Minneapolis. ``They made a judgment,
probably an accurate one, that they're not going to function very well
if you've got a full-blown crisis with a major Wall Street firm.''
Unanimous Vote
The Fed said in a statement that it will ``continue to provide
liquidity as necessary to promote the orderly functioning of the
financial system,'' repeating reassurances the central bank has made
often since credit strains arrived in August. The statement said the
Fed Board unanimously approved the arrangement with JPMorgan and Bear
Stearns.
The Fed Board, which met today at 9:15 a.m. Wa****ngton time, typically
delegates such discount-window lending authority to its regional
reserve banks when it comes to loans to banks.
``There's a clear realization among people both in the official sector
and the financial markets that some of the institutions we have built
over the last 100 years are not well adapted to the modern 21st
century financial system,'' said former New York Fed research director
Stephen Cecchetti. ``A lot of what we've been seeing have been
creative innovations to deal with problems that the institutions were
not built to handle.''
The senior staffers declined to describe how large the loan to Bear
Stearns is, and whether a private-sector bailout was attempted first
before the Fed extended credit through JPMorgan. The staff officials
said the Fed used its authorization under the law several times in the
1960s though didn't immediately have further details.
Paulson's Sup****t
Such votes require approval from five Fed governors. The seven-member
Fed board currently has two vacancies, and one governor, Randall
Kroszner, is serving past the Jan. 31 expiration of his term.
Treasury Secretary Henry Paulson, in a separate statement, said
``there are challenges in our financial markets, and we continue to
address them.'' Treasury is ``working closely'' with the Fed and the
Securities and Exchange Commission.
``I appreciate the leader****p of the Federal Reserve in enhancing the
stability and orderliness of our markets,'' Paulson said. ``Our
financial system is flexible and resilient and I am confident that the
efforts of regulators and market participants will minimize disruption
to the system.''
Robert Rubin, the former Treasury secretary who is now chairman of
Citigroup Inc.'s executive committee, said at a conference today that
the ``risks have reached a point that the right thing is to act and
act in a very serious way.''
47% Plunge
Bear Stearns shares plummeted a record 47 percent on news of the
bailout. The announcement, coupled with a re****t showing U.S. consumer
prices were unchanged in February, led traders to place 56 percent
odds that Fed policy makers will lower their benchmark interest rate
by a full percentage point at their March 18 meeting, to 2 percent.
Yesterday, the odds of such a move were 0 percent.
A reduction of that size would be unprecedented since the overnight
lending rate became the Fed's main policy tool around 1990, trumping
the Jan. 22 emergency cut of 0.75 percentage point.
It's the first time since the financial turmoil intensified in August
that Bernanke, 54, has publicly announced Fed assistance to a specific
company instead of measures open to broader sets of banks or other
financial institutions.
Most recently, the Fed on March 11 announced plans to lend $200
billion in Treasuries to primary dealers in exchange for debt that
includes mortgage-backed securities. Last week, the Fed increased
funds available through its so-called Term Auction Facility, set up in
December to lend funds to banks in exchange for a wide variety of
collateral, including mortgage debt.
`All the Problems'
``What they're doing now is going to help, but I don't know that it
will solve all the problems out there,'' said Thomas Garcia, managing
director of Thornburg Investment Management in Santa Fe, New Mexico,
which oversees $50 billion.
Bear Stearns's liquidity problem ``definitely gives some doubt as to
whether other firms are releasing all available information, and
whether this credit crunch is really over,'' Garcia said.
Bear Stearns isn't alone among financial institutions stung by the
credit squeeze to be bailed out. The U.K. government was forced to
nationalize Northern Rock Plc last month after the first run on a
British bank in more than a century and take on 100 billion pounds
($203 billion) in liabilities. Two German banks have also received
emergency aid.
While U.S. authorities have been faster than their U.K. counterparts
in announcing the rescue package for Bear Stearns, former Bank of
England policy maker Willem Buiter says that doesn't make their course
of action was the correct one.
``This creates the same moral hazard issues that we saw with Northern
Rock,'' said Buiter, now a professor at the London School of
Economics. ``This bank is being given access to public money, and we
don't know what the terms are.''
To contact the re****ter on this story: Scott Lanman in Wa****ngton at
slanman@[EMAIL PROTECTED]
Updated: March 14, 2008 17:34 EDT
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