Filed under: JPMorgan Chase (JPM), Bear Stearns Cos (BSC)
The Economist reports that the Federal Reserve is now doing something that it has done during the Great Depression and in the 1960s — put its own capital at risk to keep the banking system from collapsing. The Bear Stearns Companies (NYSE: BSC) saw its stock lose 47% of its value today because no other banks will do business with it.
The Fed is creating the illusion that it is not bailing out Bear Stearns by using JPMorgan Chase & Company (NYSE: JPM) as the conduit through which its bailout will flow. JPMorgan will assume the Bear Stearns collateral and will forward the Fed’s capital to Bear Stearns — but this will only last for 28 days. Here’s one way that the Fed is putting itself at risk — if Bear Stearns’ collateral declines in value, the Fed — not JPMorgan — will take the hit.
This move is not the first one that puts the Fed at risk. Earlier in the week, the Fed put $200 billion on the line and agreed to take Mortgage Backed Securities (MBSs) as collateral for those 28 day loans. Once again, the Fed is assuming the risk that the MBSs will retain sufficient value to protect the Fed’s loan. But many questions remain:
Continue reading How the Fed is putting itself at risk for Bear Stearns
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