Capitol Hill Grill
Bernanke to answer questions about Fed's role in Bear Stearns deal.
Federal Reserve Chairman Ben Bernanke will face stiff questions regarding the Fed's role in JPMorgan's (JPM) purchase of Bear Stearns (BSC).
Threatened by a liquidity crunch and potential insolvency, two weeks ago Bear Stearns agreed to be purchased by JPMorgan for just $2 per share. The price was later upped to $10 and the Fed provided $29 billion to backstop Bear's illiquid mortgage-backed securities portfolio. In a letter released yesterday by The Wall Street Journal, Treasury Secretary Hank Paulson confirmed the Treasury Department would actually foot the bill should the Fed lose money on the deal.
According to Bloomberg, tomorrow's hearing will focus on precedent. Senator Charles Grassley said the Bear Stearns example "...sends a very dangerous signal. People are willing to take chances if they think that the federal government is going to step in and bail them out all the time."
While politicians praise the central bank for helping avert a systemic collapse, they fret about Bernanke's rewriting of the rules as they concern government's role in the financial markets. Together with Paulson's new regulatory proposal, control is being increasingly consolidated.
Many support the move, hoping the simplification of oversight will prevent crises like the one we're currently experiencing. Although flawed, the existing system keeps power in the hands of many, rather than few.
The problem isn't that the system is poorly organized; it's that those in charge don't take the necessary actions, even when they recognize a problem. Back in 2005, at the peak of the housing bubble, the Fed expressed concern over poor underwriting standards and risky mortgages. It issued weak guidance on lending practices that had little or no effect. In short, regulators closed their eyes as Wall Street lenders like Bear, Lehman Brothers (LEH) and UBS (UBS) pushed the envelope with new and creative mortgage products. In the rush to beat the bursting of the bubble, underwriting standards were thrown out the window.
We are now reaping the consequences of their inaction.
For more on Federal Reserve Chairman Ben Bernanke, check out Hoofy & Boo's always astute report.
The information on this website solely reflects the analysis of or opin=
=3D =3D3D ion about the performance of securities and financial markets by =
the wr=3D iter=3D3D s whose articles appear on the site. The views expresse=
d by the wri=3D ters are=3D3D not necessarily the views of Minyanville Medi=
a, Inc. or members=3D of its man=3D3D agement. Nothing contained on the web=
site is intended to con=3D stitute a recom=3D3D mendation or advice address=
ed to an individual investor =3D or category of inve=3D3D stors to purchase=
, sell or hold any security, or to =3D take any action with re=3D3D spect t=
o the prospective movement of the securit=3D ies markets or to solicit t=3D=
3D he purchase or sale of any security. Any inv=3D estment decisions must b=
e made =3D3D by the reader either individually or in =3D consultation with =
his or her invest=3D3D ment professional. Minyanville write=3D rs and staff=
may trade or hold position=3D3D s in securities that are discuss=3D ed in =
articles appearing on the website. Wr=3D3D iters of articles are requir=3D =
ed to disclose whether they have a position in =3D3D any stock or fund disc=
us=3D sed in an article, but are not permitted to disclos=3D3D e the size o=
r direct=3D ion of the position. Nothing on this website is intende=3D3D d =
to solicit bus=3D iness of any kind for a writer's business or fund. Mi=
ny=3D3D anville mana=3D gement and staff as well as contributing writers wi=
ll not respo=3D3D nd to em=3D ails or other communications requesting inves=
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter