Federal Reserve Extends Its Lending Authority In Bear Stearns Bailout

The Federal Reserve Bank has decided to extend its own authority in an effort to “stem a credit crisis that is engulfing the financial system and threatening a deep recession, ” says the Wall Street Journal.

For the first time securities dealers, effective today and for at least the next six months, may borrow from the Fed on much the same terms as banks. The Fed also lowered the rate charged on such borrowings from what’s known as its discount window by a quarter of a percentage point, to 3.25%, and extended the maximum term to 90 days from 30.

“These steps will provide financial institutions with greater assurance of access to funds,” Federal Reserve Chairman Ben Bernanke said in announcing the emergency initiatives yesterday evening.

Meanwhile, Bear Stearns reached a deal to sell itself to JPMorgan for a measly $2 a share:

Bear Stearns had a stock-market value of about $3.5 billion as of Friday — and was worth $20 billion in January 2007. But the crisis of confidence that swept the firm and fueled a customer exodus in recent days left Bear Stearns with a horrible choice: sell the firm — at any price — to a big bank willing to assume its trading obligations or file for bankruptcy.

“At the end of the day, what Bear Stearns was looking at was either taking $2 a share or going bust,” said one person involved in the negotiations. “Those were the only options.”

To help facilitate the deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns’s less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company. Fed officials wouldn’t describe the exact financing terms or assets involved. But if those assets decline in value, the Fed would bear any loss, not J.P. Morgan.

So that sounds fun! Big hugs to all you Wall Street types. CNBC says there is a flood of sad-looking Bear Stearns employees carrying binders and garbage bags full of personal items out the front door.

J.P. Morgan Buys Bear in Fire Sale, As Fed Widens Credit to Avert Crisis [WSJ]
Central Bank Offers Loans To Brokers, Cuts Key Rate [WSJ]
(AP Photo/Jin Lee, file)

Comments

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  1. Tank says:

    Because you can borrow yourself into prosperity. Good plan.

  2. diamondmaster1 says:

    Wait.

    This is just the tip of an ever-growing iceberg that will force a major renovation of our entire economic system, running into 2010–when the largest number of baby-boomers hits retirement age.

    Those of you reading this just THINK you’re going to retire on time, and comfortably.

    Think again.

  3. kimsama says:

    Bear Stearns! The “B” is for Bailout!

    (or is the B.S. for, well, B.S.? Ah, so many tempting possibilities).

  4. orielbean says:

    Funny that the bear is a symbol of market selling.

  5. ARP says:

    This is just the free market at work. It’s only a bailout or entitlement program when we do it for ordinary citizens.

    So, the Fed helping large companies who pay their executives millions of dollars for doing a horrible job is capitalism. Helping ordinary people who got in trouble on their mortgages (regardless of fault) is an evil socialist plan that takes away my money.

    Wow- this Republican thing is easy.

  6. HeyThereKiller says:

    not to mention JP also now owns the Bear Sterns building, which itself is probably worth more than $300mil

  7. backbroken says:

    Who do I make the check out to, and where do I send it if I want to help these poor folks?

    Maybe I should just make it out to the IRS, memo: advance on 2008, 2009, 2010, 2011, and 2012 taxes.

  8. rekoil says:

    @HeyThereKiller: All well and good right up until a Bear Stearns creditor forecloses on it…

  9. spamtasticus says:

    An illegal Banking Cartel. Just in case you did not already know this. The FED is not a government bank or organization any more than Federal Express. The FED prints our money and then “Loans” it to the federal government (That is us) and charges us interest on our currency! And just in case you were wondering where they get the dollars to loan out. They just say Poof! and they have more. That is correct they dont have anything to back up the dollars they print or loan out (most loans are just data and not even bills, not that bills are worth anything). That is correct, it is a company that prints money and then loans it to us then charges us interest on that loan. If this is news to you, do a little research.

    Part 1 of 5:

    Ron Paul for President! Abolish the FED.

  10. lightaugust says:

    @ARP: Beat me to it. Only I think I’m much angrier and long winded about it.

  11. Steve Trachsel, Ace says:

    @spamtasticus: Go away Paultard. Werent we done with you people when he quit, or did you inhale a little too much of the blimp exhaust?

  12. less_is_best says:

    After Enron, I am sure that nobody at Bear Sterns had their retirement money in Bear Sterns stock only, right? Right?! Nobody would be that stupid. Right?

    DOPES!

    I will not read any of the sympathy stories about to come out for poor single mothers, and under paid secrataries, who lost everything because of Bear Sterns. You lost everything because of greed. That makes me laugh! LOL!

    DOPES!

  13. Drowner says:

    @ARP:
    Close. The fed helping a large companies not collapse so quickly it creates a black hole in the banking world that we have no hope of escaping from is… welcomed.

    Execs did a poop job, this is true. But the bailout money isn’t for them.

  14. spamtasticus says:

    Another good flick that is considerably more current:

  15. JustAGuy2 says:

    @less_is_best:

    In fairness, a lot of those people were locked up in Bear stock – they couldn’t sell.

  16. JustAGuy2 says:

    @spamtasticus:

    And refunds the interest back to the Treasury. You kinda left that little piece out – not surprising, as it completely undermines your little “evil Fed” rant.

  17. mac-phisto says:

    so BSC, with almost $400 billion in assets goes to the highest bidder – JPM – for $240 million. wha-wha-what?

    i dunno about you guys, but i’m a little scared.

  18. spamtasticus says:

    @JustAGuy2 & Tracy Ham

    I found with cartoons that explains it nice and slow for you guys:

    Make sure and watch them all

  19. teapartys_over says:

    @Drowner: OK, but then why do the execs get to keep their ginormous salaries/bonuses/parachutes? To the tune of like $350 million/year?

  20. Drowner says:

    @teapartys_over: So they don’t go “See Ya!” and NO ONE is running the show. Someone’s gotta steer this thing to the ground and if current execs left I’m fairly certain no one would take that fire-filed pilot’s seat .

    If you still don’t buy it, look at it this way: when someone dies in a hospital you don’t take the doctor’s salary away.

  21. Wormfather says:

    @less_is_best: 30% of Bear Sterns is owned by it’s employees.

    In other news, the Fed is trying to f*ck us really hard. I feel it in the roof of my mouf.

  22. Wormfather says:

    @JustAGuy2: Yeah, everyone forgets that the Fed is not allowed to make and keep any profits.

  23. Trai_Dep says:

    Boy, am I really glad that Gawker Media opted for implementing embedded videos rather than a viable Ban The Troll feature. Good call!!

  24. Blueskylaw says:

    So the Fed is bailing out a company that took enormous risks with our money while making BILLIONS in profit. Now that the risk bit them in the A$$ they cry uncle and say we are too big to fail, please save us. A year from now the CEO will be bragging about how well he ran the company while collecting a few hundred million in salary and bonuses. Business back as usual.

  25. Blueskylaw says:

    .

  26. stinerman says:

    @JustAGuy2:
    Seeing as Bear Stearns stock dropped about 90% in the span of a weekend, I’m not so sure they’d have had the chance.

  27. rhombopteryx says:

    @JustAGuy2:
    You should hear about the “evil grocery store” rant.
    There’s this process where stores invite people in and the people look at the groceries and take them to an aisle and then the checkers take the people’s money – and don’t give it back.
    (Oh. and P.S. the people leave with the groceries.)

    Yeah, we could have a serious discussion about taxpayer bailouts or why the Fed is making this loan non-recourse, or whether this was authorised by the laws governing the Fed OR we could travel down the paultard path…

  28. chiieddy says:

    @HeyThereKiller: Actually, NPR this morning estimated it in the billions.

    However, the Bears Stearne shareholders have to approve a deal for $2/share when their stock was valued at ~$30/share at close of market on Friday. How likely is that?

  29. azntg says:

    The expenses are socialized while the profits are privatized. No matter what model you’re running on, this seems to be happening left and right. I know I’m being pessimistic, but do you think the chances of an implosion is imminent?

  30. That70sHeidi says:

    Heard from an insider that the reason they sold for $2 a share instead of bankruptcy was so that the execs keep their bonuses. If they declared bankruptcy, they’d have to give all that money back and that was sure not happening. It had nothing to do with “going bust”… unless that was referring to private executives giving back a couple mil.

    Just sharing!

  31. hwyengr says:

    @Drowner: Sure they do. Malpractice. And I’m not talking about the right-wing tort reform scare tactic, but rather when a doctor is willfully negligent.

    Everybody was looking the other way when these execs were putting up unsustainable profits and growth, and now that we’re crashing back to earth, they get their golden parachutes to invest in Euro futures.

  32. spamtasticus says:

    @JustAGuy2:

    Not sarcasm:

    Please post a source for this fed to trasury refund you speak of. I’m deeply interested.

    @Trai_Dep:

    Videos are bad?

  33. spamtasticus says:

    doh! Treasury*

  34. deadlizard says:

    Fed: Please don’t use my tax money to bail out people who wouldn’t return the favor if it was the other way around.

  35. Mr. Gunn says:

    mac-phisto: Not exactly. They’ve got about $30B of worthless securities on the books.

  36. JustAGuy2 says:

    @spamtasticus:

    Here’s a link to the Fed’s annual income statement. In both of the years in question (96 and 97, in this example), the Fed made a “profit” of about $21BN, and rebated almost exactly the same amount to the Treasury.

    [findarticles.com]