Monday, March 17, 2008


Too Big To Fail

Emerging from an ugly winter, I find the worlds (financial and the real one) all agog over the Fed’s bailout of Bear Stearns, the investment bank which got behind on its payments to folks from whom it borrowed copious short term dollars.

The Fed and Bear Stearns??

Say it boys and girls, “Bear Stearns was deemed too big to fail.” And the Fed made sure that it didn’t, at least not last week. JP Morgan, which initially acted as a conduit for the Fed’s money, now has acquired Bear for pennies on the dollar.

(Kind of reminds you how sweet the first deals of the Resolution Trust Corporation were for those acquiring thrift assets.)

Did anyone doubt that the Fed would do and will do its damndest to keep large money center banks or investment banks afloat, no matter what precedents it set? The Fed also announced on Sunday a new lending “facility” for investment banks.

I am going to go a bit easy on the nation’s central bank and Ben Bernanke because I think it was the right thing to do--and the Fed may have to do it again or even a half dozen times--until the “market” (forever now to have a new Constitution Avenue senior government partner) picks and chooses between business casualties and survivors and we get on with our national economic lives.

The folks whom I refuse to go easy on are those (and here the Greenspan-Fed gets some share of the heat) who, for very selfish reasons, were fixated on Fannie Mae and Freddie Mac. These interests tried to make “too big to fail” only a GSE epithet. They tried to convince the world that both GSEs were sure to require federal bailouts and would curl up and die on Uncle Sam’s doorstep.

Mainly the old FM Watch crowd, the Bush Administration ideologues, and many in the conservative think tanks railed about the GSEs “being blessed” with a “too big to fail label” and how market corrosive that quality was.

What will they say now?

Bear Stearns, a member in good standing—until last week—in the Wall Street community and a ”good old fashioned company” beat the GSEs to the Fed’s heretofore exclusive banks-only teat.

How will JP/Bear’s market operations be looked at going forward? How about Goldman, Merrill, Morgan Stanley, Lehman, or Credit Suisse?

I’ve always described as “existential” the Fed’s ability to use its “too big to fail,” authority, which means the central bank’s willingness to quickly give money to an ailing major market player no matter what its charter or function.

“Existential” to me means the application has no eligibility definition, just that the regulatory authorities would know TBTF when they saw it. Last week, they saw “it.” And “it” was Bear Stearns, not even an entity that was Fed regulated.

The Fed and the Treasury (certainly the latter was involved in the decision if not the funding) decided “Bear Stearns was too big to fail”--using some set of criteria--and they moved accordingly.

I noticed there was some carping from Carlyle Capital officials over the initial Bear “federal bailout.” I suspect that Carlyle execs bitched not because of their rock hard flinty market discipline issues, but because in their earlier in the week moment of need the Treasury/Fed didn’t throw a relief package their way. Meaning the demise of Carlyle’s mortgage securities arm wasn’t TBTF.

What bank or financial services company could “go south” next?

And, if any of those institutions are in financial peril and can find no traditional lenders, will they bravely step up and tell the Fed, “No we are not too big to fail, damn it, and just let us go. On principle (no pun intended), we don’t want your money. We lived by the sword, so let us perish the same way!”

Uh, uh, not in God’s lifetime.

If the Fed hadn’t acted on Bear, even though its initial foray may have to be replicated, it would have reaped more anguish for “fiddling while Rome burns.”

Paul Volcker, after suffering brickbats for his heavy hand in quelling inflation in the early 1980’s by jacking up interest rates and enforcing illiquidity, later was deemed a hero for his resolve.

I hope that Ben Bernanke and his Fed colleagues eventually achieve similar acclaim for their actions.

And for the institutional GSE-haters, maybe the Fed’s actions will force on them a little humility, because they or one of their members could be the next Bear.

Maloni 3-17-2008