Well, the expected "assisted acquisition" of Bear Stearns by J.P. Morgan Chase has been hastily completed, in hopes of forestalling a dramatic world-wide stock plunge to begin the new week.
Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion credit line to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.
In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.
The moves amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation's financial markets from what officials feared could be a chain reaction of defaults.
After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.
In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank's own risk.
The Fed, working closely with bank regulators and the Treasury Department, raced to complete the deal Sunday night in order to prevent investors from panicking on Monday about the ability of Bear Stearns to make good on billions of dollars in trading commitments. http://www.nytimes.com/2008/03... |
| What, you may ask, was the ratio of capital risked by the J.P. Morgan Chase private risk-takers (whose business acumen makes them worth the big bucks) to the capital risked/provided by you and me lowly taxpayer (with the assistance of our prestigious Fed)? Well, they put up $2 per share-- less than 10% of the value those stocks were trading for on Friday when the bell rang. As I understand it, the Fed's guarantees have the US Home Team responsible for kicking in "up to" $254 per share of stock.
Nice work if you can get it.
What does this mean for NY? Well, look for downsizing of the finance sector's workforce, along with the radical downsizing of the sector's reported asset values. And, it will be a pretty clever financial sector worker who will get a bonus this year. Even without a meltdown, this is going to hammer NYS revenues.
And, there really might be a meltdown. As per:
In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as "primary dealers" and trade Treasury securities directly with the Fed. NY Times http://www.nytimes.com/2008/03...
Who knew that investment banks could be described as "struggling"? Reminds you of those basic public assistance monthly checks that haven't been adjusted for inflation in 18 years here in NYS. We should get to that some day after we have stabilized the investment banks, I suppose.
For a more technical view of the situation (we must, as it turns out, stop short of total collapse of our existing institutions, for everyone's good), this from Mark Thoma http://economistsview.typepad.... yesterday:
Stabilizing Credit Markets: The TSLF and Other Asset Composition Policies
As part of a package of proposals to reduce the risks of a dangerous downward spiral in credit markets, I've been pushing for the Fed to "sop up" some of the existing financial market risk by using open market operations to purchase the risky securities from the private sector and replace them with government bonds or money (e.g., [1], [2], and [3] among others).
Jim Hamilton explains why he believes that the Fed is already moving in this direction by assuming financial market risk through the conduct of "asset-side" Fed policy that changes the composition of balance sheets (though I would like to see the Fed use these policies to take on more risk than they have so far). He also explains the potential downside of these trades, the possibility of default on the assets the government is holding, and - as I have also contended - why the downside may not be as large as some people think.
We will get back to issues of regulation and equity (and the famous, moral hazard) as soon as the sandbags are in place, though, right? |
