The Bear Stearns Sale Is Under The Microscope
Thursday, March 20, 2008SUSIE GHARIB: Regulators are reportedly taking a closer look at JPMorgan's buyout of Bear Stearns. The Securities and Exchange Commission is said to be investigating the events leading up to the collapse of Bear Stearns. Specifically, the SEC is looking into last week's surge in put options that came due before the firms failed. Meanwhile, there are several attempts to stop the takeover. A pension fund sued Bear Stearns today, requesting a judge to halt the deal. And Joseph Lewis, the largest Bear Stearns shareholder, said he may pressure the firm to consider other alternatives.
PAUL KANGAS: The Federal Reserve's role in financing that Bear Stearns sale is coming under increased scrutiny on Capitol Hill. Iowa Senator Charles Grassley is looking into deal's details in tandem with the Bear bailout and the Fed opened a new line of credit to Wall Street banks. That window is being widely used, averaging $13 billion a day in loans this week. As Darren Gersh reports, all this raises the question of what happens if the Fed loses money on these deals.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Analysts say the Bear Stearns deal may be the riskiest action the Fed has ever taken to prop up financial markets. The Federal Reserve lent JPMorgan $30 billion to buy Bear Stearns, taking $30 billion in hard-to-trade assets off Bear's books. The key question says former Fed economist Douglas Elmendorf, is the quality of that collateral.
DOUGLAS ELMENDORF, ECONOMIST, BROOKINGS: If it had to sell that collateral, we don't know and the Fed doesn't know how much it could get for it. So there is a risk in that case that it won't end up with enough collateral to cover the loan.
GERSH: As of last week, the Fed held Treasury bonds worth more than $700 billion. The interest on those assets funds Fed operations. The surplus, $34.4 billion last year, was sent here, to the U.S Treasury, which is how this gets back to you, the taxpayer.
ELMENDORF: If the Fed loses money by lending without enough collateral, then it will have less to send over to the Treasury. That will reduce the receipts of the Federal government.
GERSH: Is that a risk worth taking? Economist Mark Zandi says the Fed is acting to offset a much larger and more costly meltdown.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: If they take a loss, they take a loss, because, at the end of the day, they are going to save a lot of us jobs and income and wealth.
GERSH: In addition to the Bear Stearns deal, the Fed has also offered to lend up to $400 billion to banks and Wall Street firms. But there, the risk may be limited; those loans are short term, no more than 90 days. The Fed also insists borrowers take a haircut, putting up good quality collateral worth more than the loan taken out. In Bear Stearns' case, the collateral was valued at distressed market prices and as a senior Fed official puts it, the Fed will not sell at a fire sale. Former Fed Governor Susan Phillips says that patience is often rewarded.
SUSAN PHILLIPS, DEAN, GEORGE WASHINGTON SCHOOL OF BUSINESS: In other situations, when the Fed has taken on assets -- higher risk assets -- it turns out, if they hang in there long enough, they've made money on it. Now, not a lot of money, but they'll find a way, I think, to manage that.
GERSH: Even so, if financial conditions were to deteriorate sharply, the Fed could be on the hook for potentially huge losses, though at that point, the nation would have far bigger economic worries than the shape of the central bank's balance sheet. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: That Bear Stearns rescue plan also concerns Representative Barney Frank and today he renewed his call for tougher regulation of investment banks. Speaking at a town hall meeting in Boston, Frank said tackling the issue of increased regulation is a top priority. He proposes creating an agency that would have broad powers to regulate a wide range of financial institutions. Frank, who chairs the House Financial Services Committee, says the current record number of foreclosures can be traced to unregulated sectors of the financial system.
REP. BARNEY FRANK, CHAIRMAN, HOUSE FINANCIAL SERVICES COMMITTEE: The absence of sensible regulation has taken some parts of our economy hostage and, sometimes, you got to pay a ransom. Sensible regulation is pro-market because it can instill a degree of confidence in the people who've got the money and are sitting on it that we might not otherwise be able to get.
GHARIB: Frank also says Congress should consider improvements in investment bank reserve requirements and balance sheet disclosures. Currently, the Securities and Exchange Commission oversees investment banks.
