Hmm. Well, we have now seen the terms of the JP Morgan’s revised $10 a share offer for Bear Stearns and I do not think it is a good outcome for the Federal Reserve.
The Fed does gain something from the new deal – JP Morgan takes on liability for the first $1bn of losses from the $30bn portfolio of illiquid assets that it guaranteed as part of the first agreement.
In return, however, it is allowing Bear shareholders to get five times the original price for an investment bank that was in effect insolvent 10 days ago without the backing of the taxpayer.
We have moved an awfully long way from 1998, when the New York Fed was criticised for simply calling a meeting of Wall Street banks to organise an attempted rescue of the hedge fund Long-Term Capital Management.
This time, the Fed has not only committed public money but has allowed the deal to be renegotiated in a way that grants Bear’s shareholders a bigger reward.
The Fed can argue that the structure of the new deal is in some ways preferable and the Bear shareholders still get relatively little for their equity. From that point of view, the Fed has minimised moral hazard while keeping Bear afloat.
The fact remains that it has been dragged into a public fight involving JP Morgan and Bear shareholders and has had to accept a further compromise. That cannot be a good thing for its authority.
