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March 16, 2008



Kudlow has an interesting article on the Bear Stearns debacle. In it he points out that the difference between commercial banks and brokers (investment banks) played a role:

Since the elimination of the Glass-Steagall Act in 1999 — a move that broke down the wall separating commercial and investment banks that had existed since the 1930s — the Federal Reserve never changed its discount lending policies. In other words, until Sunday night, when Bear Stearns was already destined for the dustbin, the Fed was able to make loans to commercial banks like JPMorgan Chase, but not directly to brokers like Bear Stearns.

Throughout the credit crisis, which dates back to last summer, the Fed’s discount lending to banks was supposed to trickle down to brokers. But it never really did. Big banks either horded their cash or spent it for their own various purposes. As one Bear Stearns official noted to me, this is the first credit and lending crisis since the end of Glass-Steagall. And the consequences for Bear Stearns were catastrophic. While the Fed announced a $200 billion auction lending facility for both banks and brokers last Tuesday, that facility won’t be activated for a couple more weeks. So no help there.

But if the Fed had changed its discount polices to reflect the post-Glass-Steagall era, Bear Stearns could have accessed short-term Fed loans, even for a few days. That could have made all the difference in the world.

Watching the venerable old firm pawned off to JPMorgan Chase for a couple hundred million bucks — basically a bag of peanuts — is painful to me. The building itself is worth at least $1.5 billion.


All of this kind of makes me wonder whether Bear Stearns wasn’t some kind of sacrificial lamb. Did government policy makers hope to convince the public that a big Wall Street firm could indeed fail? Or wouldn’t be bailed out? Listen, they were buried, not bailed out.

The fact is, Bear shareholders got creamed with the $2 per share purchase price. The shareholders include all the men and women who’ve worked there for years, and who own roughly one-third of the firm’s equity.



Bear was leveraged somethng like thirty something to one. In the current environment--how could they have worked things out in a few days?

Rick Ballard


I look at it as a version of Chicago Rules based upon the Lewis buyin followed by that market crack in January. The Fed let Carlyle go last week and then fed Bear to the Great White JPM this weekend as a means of letting all the speculators who were really hoping for a replay of the S & L fiasco - a slow death scenario with Nurse Fed at the bedside (standing on the oxygen line) while pols picked winners and losers.

Instead - a couple of bullets behind the ear and viola! - it's a brand new day. $60 billion in "leverage" disappeared from the M3 in one week. That's also called "strengthening the dollar" but no one has noticed as yet. Quite unremarkably.


Rick, that seems to be Kudlow's view.

glasater, Kudlow specifically notes: "Throughout the credit crisis, which dates back to last summer, the Fed’s discount lending to banks was supposed to trickle down to brokers [i.e., investment banks like Bear]." Kudlow's point is simply that if the Fed had amended their regs on a timely basis (following the 1999 Gramm-Leach-Bliley Act) to allow commercial banks and investment banks to have equal access to the discount window this collapse might have been avoided. Kudlow was certainly not asking for overnight miracles. In fact, he suggests that, not having had the foresight to change its practices, the best alternative for the Fed at this point was, in Kudlow's words, to bury Bear, or in Rick's version, to put a bullet behind its ear--an object example to the financial community and a message to one and all that the Fed will be ruthless in this crisis.

There's merit in this view. Perhaps after having a day to think the Bear situation over, Wall St. revised its estimate of what happened and decided, with Kudlow, that this was not the bail out it was originally thought to be. If measures like this work, it may yet be possible to avoid the taxpayer bailout that Krugman expects (and which I, in my cynicism, still think not unlikely)--reminiscent of the S & L fiasco. Time will tell. If Bernanke can pull this off he'll be a hero. He is supposed to be the world's leading expert on the Great Depression, so he has probably run through his mind what should be done in the event of another financial crisis. Interesting days.


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