Fed action on Bear Stearns ‘worst policy mistake in a generation’
Posted by: in Latest NewsFiled under: Deals, Industry, JPMorgan Chase (JPM), Bear Stearns Cos (BSC), Federal Reserve
Hyperbole? Maybe.
The former head of monetary policy at the Fed called the agency’s action on Bear Stearns (NYSE: BSC) the “worst policy mistake in a generation.” To some extent, the comments by Vincent Reinhart reflect his thought that the Fed didn’t look at a number of other alternatives for saving the investment bank. According to The Wall Street Journal, “seeking other suitors, removing certain assets from Bear’s portfolio or swiftly implementing its previously announced offer to temporarily swap Treasury securities for dealers’ less liquid assets” were all options.
The comments beg the question of what would have happened to the financial markers if Bear Stearns failed. The answer the Fed gives is that assets of other firms could have been destroyed or at least might have lost some of their value.
Rienhart may have a point. The Fed has made funds available to banks in exchange for paper, some of it with little value, which is, in many cases backed by mortgage-related securities. More recently it has let primary brokers have access to money on a similar basis. That mechanism wasn’t in place when Bear Stearns was sold to JP Morgan (NYSE: JPM) with Fed backing. Reinhart’s real question is whether it was necessary to wipe our the investment bank’s shareholders in exchange for saving its customers.
The Fed probably did act too fast. How many days would it have taken to ask for other bids for the investment house? Could the Fed have kept Bear afloat during that period? The answer is almost certainly “yes”.
Douglas A. McIntyre is an editor at 247wallst.com and writes the Ten Stocks Under $10 Letter.
Entries (RSS)