My Financial Times column this week is about Bear Stearns and how it was not merely a victim of the credit crisis because its leaders brought it on themselves. You can read it here and comment below. 

Time lends perspective and having a couple of days to absorb about how the Federal Reserve acted over Bear Stearns has helped to clarify its intervention policy, which was devised on the hoof over the weekend.

Although there was a lot of worry about moral hazard - the US government protecting those who should not be protected from their financial errors - the Fed clearly tried to avoid it. It wanted to prop up Bear to avoid a fire-sale of its mortgage securities but did not want to give too much comfort to others.

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Well, no-one can complain that Erin Callan, Lehman Brothers’ new chief financial officer, lacked detail on the investment bank’s first quarter results conference call this morning.

Ms Callan rattled through a very long and thorough explanation of the bank’s earnings, balance sheet and liquidity, with the emphasis on the latter.  Given that Lehman has been fighting to persuade people that will not become the next Bear Stearns, that was wise.

Ms Callan faced some credibility questions. She has only just been appointed to the job, lacks an accounting background, had to take an exam before starting, and gave an interview to Portfolio in which she emphasised her interest in strategy rather than number-crunching:

“I see myself in more of the strategic camp. When you don’t grow up in the accounting profession and you grow up more as a deal person, your bias is to look much more at the big picture.” Otherwise, she says, “you really could consume yourself entirely just staying in the weeds.”

She obviously realised, however, that in the weeds is where investors and other banks want her to be at the moment. To judge by the market reaction, she convinced them.

Curiouser and curiouser. Perhaps when the dust settles from the JP Morgan Chase/Bear Stears deal we will look back on it primarily as a smart property deal. JP Morgan made sure that it not only got Bear Stearns’ head office at 383 Madison as part of the takeover but can buy it even if the takeover falls through.

Jamie Dimon, JP Morgan’s chief executive, apparently wants to reverse the plan to move JP Morgan’s investment banking and trading operations into a new building on the former World Trade Center site. As Felix Salmon notes this is a service to architecture since its planned building looked ghastly.

Mr Dimon cut a mean deal, albeit assisted by the Federal Reserve putting pressure on Bear’s management to sell out. The Journal points out that his option to buy 383 Madison for $1.1bn even if the takeover is voted down by Bear shareholders looks like a good alternative since it could be worth $1.4bn (at least at current Manhattan prices).

Apart from that, it is a blow to the reconsolidation of Wall Street downtown. Goldman Sachs and JP Morgan were both due to be near the WTC site and this deal leaves Goldman looking a little lonely, although it got a lot of money from New York to move there.

At least one of the other towers on the WTC site has room for a bank trading floor but none of the other Wall Street firms has so far signed up. With Mr Dimon sticking to midtown and prospects for commercial property in Manhattan uncertain at best, the prospects of Wall Street heading back downtown look slimmer.

From the Wall Street Journal: 

Amid heightened concerns over the state of the world financial system, George W. Bush gave assurances Monday that capital markets are working smoothly, adding that the US is “on top of the situation.”

There has been much fuss lately about distorted incentives in bankers’ pay that encourage them to take excessive risks because they do not suffer the full consequences of failure. I have written about it myself.

The Bear Stearns collapse shows the other side of that argument. Financial News estimates that Bear employees, who own about a third of the equity through stock bonuses and pension savings, have just lost a collective $5.2bn based on the sale price to JP Morgan compared with the share price of Bear in December.

Even divided among 14,000 employees, that is plenty of money. Because of the way in which bonuses are paid on Wall Street these days, with the bulk issued in shares that only vest after three to five years, they had little choice but to be heavily invested in the fortunes (and now misfortunes) of their bank.

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I usually find Ambrose Evans-Pritchard of the Telegraph a bit excitable but this piece (via Yves Smith) on the aversion of foreign investors to buying US Treasuries struck a chord.

The other day, I listened to a New York financier bemoaning the furor in the US about investments by sovereign wealth funds in US financial institutions. His argument was that SWFs have a choice about where to invest and the US is in no position to be fussy. It needs the capital.

He went on to point out that SWFs are sister organisations to central banks and are often headed by members of the same families in Gulf and Asian countries. If the US annoyed SWFs too much, he suggested, some of the central banks that buy Treasury bonds would stop doing so, with nasty consequences for the dollar and the US economy.

I am reminded of that point by Mr Evans-Pritchard’s piece. On the face of it, it would be stupid for any investor to act on emotion rather than according to financial principles. There is no logical reason why a fuss in Congress over SWFs’ equity investments in the US should lead to foreign investors boycotting Treasuries.

But the financial world does not always work on strict logic, as behavioural economists tell us. I wonder whether my New York financier was speaking with some inside knowledge of the mood abroad?

There is one thing about being a central banker in the UK or the US. Most of the time, it sounds like a pretty dull business of looking at economic statistics and deciding whether to move interest rates a quarter of a point in either direction. Every so often, however, there is an adrenalin-filled weekend in which you get to decide whether a financial institution survives or goes under.

Last night, I reckoned the Fed had done a good job of balancing moral hazard with financial uncertainty by manoeuvring Bear into the hands of JP Morgan for a knock-down (actually negative) price and only having to stand behind $30bn of assets. That looked like a better outcome than the Bank of England had managed with Northern Rock.

In the cold light on morning, with the US markets open and Armageddon apparently postponed, I think that observation stands. But, of course, the difference between Northern Rock and Bear Stearns is that the latter is not a deposit-taking institution and the only run on the bank was from hedge fund customers withdrawing from its prime broking business. Rescuing hedge funds and other counter-parties is not the ordinary business of the Fed.

So how did the Fed do in terms of avoiding moral hazard? Let us take the parties in turn.

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Does Bear Stearns own 383 Madison Avenue, the Manhattan building from which it operates? This question is, as John Carney and Choire Sicha point out, oddly difficult to answer.

But the answer determines whether Bear was sold for a song or actually paid JP Morgan Chase to take it over.

Bear’s building is worth at least $1.2bn and probably quite a bit more. So, if Bear owns it, then the bank it effect gave JP Morgan a net $1bn to take on its balance sheet (or some of it, since the Federal Reserve lent a helping hand).

On the other hand, if Bear does not own it, then it received $230m, valuing itself at a princely 2.5 per cent of book value. That is not a lot, but it is at least something.

JP Morgan insisted during its Sunday night conference call that Bear owns the building, but there is some confusing talk about a synthetic lease and the building being an off balance sheet asset. Still, the consensus seems to be that, if anyone owns 383 Madison, Bear does.

So what looks like a derisory price for Bear’s business is actually a negative one.

Update: Justin Fox concludes from this that the Fed handed Bear to JP Morgan on a plate.

Go back a few weeks and the idea that JP Morgan Chase would have been able to snap up Bear Stearns for $230m - a big discount to the value of its Manhattan headquarters, never mind the remainder of its business, would have been laughable. But that is what has just happened.

The reason that JP Morgan could get such a bargain deal is, of course, that Bear would have collapsed last week without the intervention of the US Federal Reserve, which gave Bear an emergency funding guarantee.

The Fed followed up on Sunday by guaranteeing funding for about $30bn of Bear’s less liquid balance sheet assets, which gave JP Morgan comfort that it can de-leverage Bear’s balance sheet without too much pain. More pain, that is, than it is pricing in with its low-ball offer.

Any time that a central bank steps in to rescue a financial institution, it had better have a good defence to those who argue that it is interfering wrongly in markets and promoting moral hazard.

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