Posted on 04/03/2008 9:22:59 AM PDT by TigerLikesRooster
April 3, 2008
Ben Bernanke admits Bear Stearns was hours from collapse
Dearbail Jordan
US Federal Reserve chairman, Ben Bernanke, today revealed that Bear Stearns was just one day away from going bust when the central bank stepped in to save the Wall Street bank to prevent chaos and a "severe" impact on confidence.
Speaking for a second day in front of US Congress, Mr Bernanke attempted to justify JP Morgan Chase's rescue of Bear Stearns, in a deal that included the US Fed agreeing to back $29 billion of the troubled investment bank's assets.
Mr Bernanke said: "... on March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for bankruptcy the next day unless alternative sources of funds became available."
The Fed chairman said that the central bank was forced to step in because the US financial system is "extremely complex and interconnected", and the collapse of Bear Stearns would have led to a "chaotic unwinding of positions in those markets are could have severely shaken confidence".
Mr Bernanke added: "Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."
JP Morgan Chase agreed to acquire Bear Stearns for an initial $2 a share, valuing the lender at just $240 million. However, an investor outcry forced JP Morgan to increase the offer to $10 a share, as well as taking on $1 billion of Bear Stearns' assets with the remaining $29 billion backed by the US Fed.
Jamie Dimon, chief executive at JP Morgan, who was also appearing before Congress today, said the bank would not have offered to buy Bear Stearns if the Fed had not agreed to back the assets. His co-speaker, Alan Schwartz, chief executive at Bear Stearns, said today that the bank was not involved in negotiations between JP Morgan and the government regarding the $30 billion asset deal.
Mr Schwartz also maintained, as he said days before Bear Stearns nearly went bust last month, that the run that brought the lender to its knees was due to a lack of confidence and not because of a lack of capital or liquidity.
Mr Bernanke today reiterated his forecast that the US economy would slow in the first half before staging a recovery in the second half. However, like yesterday, Mr Bernanke refused to label the current economic situation as a recession.
It emerged today that US unemployment claims unexpectedly spiked last week by 38,000 to the highest rate since September 2005, alarming investors ahead of monthly jobless figures due out tomorrow.
New data revealed that the number of unemployment claims rose to 407,000 for the week ended March 29, above an expected 370,000 and the previous week's total of 369,000.
The sudden rise in benefit claims sent the Dow Jones industrial average down 48.6 points at 12,556.7 as investor grew nervous that today's figures are an indication of employment numbers that are due out tomorrow that are expected to show non-farm pay rolls for March have fallen by 60,000.
excellent post!
"...and acknowledge that if any losses arise out of the special facility extended by the FRBNY to JPMCB, the loss will be treated by the FRBNY as an expense that may reduce the net earnings transfered by the FRBNY to the Treasury general fund."
Translation: the tax payers will get stuck with the bill.
Since you know that era well, it is reassuring to hear you say that.
The money quote:Then why do the "resident experts" continue to claim that taxpayers will NOT be who ends up bailing out Bear Stearns? BTW, what is the incentive for the Fed to insure that the taxpayers AREN'T stuck with the bill? Wouldn't it be to the Fed's and JPM's advantage to ensure that they get the most money out of this "transaction"? (wouldn't that more likely happen if a loss was ensured...so that the Treasury ala taxpayers would end up FUNDING this bail out?...or, is that just too cynical and unkind of me to think about the Fed and the corporate greedholders? : )"...and acknowledge that if any losses arise out of the special facility extended by the FRBNY to JPMCB, the loss will be treated by the FRBNY as an expense that may reduce the net earnings transfered by the FRBNY to the Treasury general fund."
Translation: the tax payers will get stuck with the bill.
If that's the case......then we are much worse off than they are pretending.
Dunno. Let's ask one...
66
Just one short, lol!
On another forum who’s membership consists of Traders that either make a living or suppliment their incomes by trading, there is serious talk about suing the Fed for using taxpayer funds for the bail out.
If they get a lawyer who’s willing to do that...he might want to get a bodyguard.
I wouldn’t be surprised to find that The Fed is immune to being sued.
That is an incredibly simplicity interpretation of this whole event.
It not obvious but I am totally and completely in agreement with you on a philosophical level. We’ve got whores coming out of the woodwork in D.C.
But we can’t just stand on our principles and then allow the country to sink back to the 1970s financially. It won’t cause any great lessons to be learned. We’ll just be the ones who get blamed for having european unemployment levels and China, India and Dubai will happily step in and create the financial markets we refuse to condone.
There is nothing inherently unethical about the financial markets. And if the Fed didn’t exist, the situation would be far, far worse because there would be nobody managing the US currency.
I know it seems like there are just a bunch of guys in expensive ties on Wall Street who are doing all this stuff without the approval, consent or even concern of the people on Main Street. And mostly that is true. But....and this is a really huge but, without those financial markets creating the new types of loans, mortgages, derivatives, collateralized debt obligations and junk bonds we do not have capitalism or entrepreneurs in America. We are the envy of the world because our markets are free enough to create innovative products which increase the amount of money that comes into our country from overseas. And despite what we hear from the democrats about our country being ‘owned’ by the Chinese, foreign investment in the U.S. is absolutely, completely and fabulously good for America and Americans. We should want MORE and not less of it. They don’t OWN us as much as they are now dependent upon our success in order for their investments to be profitable.
Everybody at Bear Stearns is now walking dead. They are all screwed. They failed on a scale which will be the stuff of entire books and business school lessons on what NOT to do. Nobody won here except you and me. And JP Morgan who got a great deal.
And we aren’t bailing out Bear Stearns. We are loaning them money for which we have assets as collateral and we also get paid back from the first money earned by Bear Stearns/JP Morgan. This is as solid as loan as is possible. We did it with Mexico in 2003. It’s not risking our tax dollars. It’s a chance to use that money to do some good without costing the taxpayers a dime (actually, it makes the taxpayers 3% interest).
But I agree with your sentiment. I’ve been poor. I’ve lived in towns with 1200 population and I’ve worked in warehouses. But I’m trying to give a little more balance perspective so everybody on FR doesn’t just take the spin at face value.
The Fed is a private corporation....they are not immune from a suit.
One just has to find a position that would be deemed as “standing” before the courts....according to what the people are saying on that forum I mentioned.
I just finished reading “The Creature from Jekyll Island” and the Fed is not what it appears to be.
The following is a video which explains:
Our Confusing Economy, Explained
http://www.npr.org/templates/player/mediaPlayer.html?action=1&t=4&islist=true&id=13&d=04-03-2008
I yield to another's comments, whose expertise is in the financial market/field:
"The first half is excellent, maybe the best primer for average people that I've heard. Initially he lays the blame right where it belongs: Phil Gramm, the Fed and the culture of deregulation. Unfortunately, later Greenberger supports the BSC deal as "necessary" and indirectly blames speculators for the derivatives mess. Still worth a listen and maybe a forward to friends who are trying to get it but having trouble connecting the dots."
It's funny that many who disagree with Friedman that the Fed's unwillingness to bail out the Bank of United States caused the recession to turn into the Great Depression usually say it was another chain, Caldwell and Co. in TN, that caused the collapse. They don't seem to get the irony that either way, it was the Fed that screwed up by not doing its job.
meant to say AUDIO...not video
Drudge had a story today that suggested we were VERY CLOSE to that, and that the recovery of not only our own markets but markets worldwide are largely due to the Fed's action.
No, it works like this: while no one company is “that big,” ANY large bank collapse can spark fear and uncertainty. Since the whole worldwide system is built on fractional reserve banking, and since no bank EVER has enough money to meet all liabilities in cash, fear and uncertainty can = runs. Runs are the death of financial systems.
That is what I've been reading on financial forums...even in the couple weeks leading up to Bear Stearns. But they are NOT believing all's well even now.....
LOL. Kind of depends on what you mean by “well.” I think today many people were saying they thought the financial troubles had hit bottom, and were finally turning a little.
As is having debts in excess of reserves.
My understanding is that many banks are beyond their reserves and have and are borrowing money from the Fed to meet those requirements....those loans to meet reserve requirements do not extend forever.
At some point, they need to meet their reserves.
If they sell their assets to do that, that means they will have to have assets marked to market rather than the fictional amounts on the books.
I know of one company that got about .18 cents on the dollar doing just that.
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