Faster Than a Speeding Bullet?

Red Lion was out of pocket when the deal went down but don't worry, I'm on it now. Before you get your knickers in a knot from reading media coverage, read what JPM told its shareholders about the deal.

Here's how the terms sheet describes the Fed's participation: Special Fed lending facility in place; non-recourse facility to manage up to $30B +/- of illiquid assets; largely mortgage related.

I wish I could write like that. Here's the dealio for realio: The Fed guaranteed around $30 million of debt to Bear Stearns on a non-recourse basis, meaning with no recourse to Bear Stearns if the debt is worthless. The total tab to the Fed will depend on how "illiquid" the "largely mortgage related assets" really are. Loren Steffy described the assets as a "toxic debt pool." The sun may come out tomorrow and if capital markets rebound, the debt may pay out, reducing or even reversing the Fed's exposure.

Is the Fed's guarantee a moral hazard-creating big government bailout? Or was it necessary to avoid an even bigger whollop to an already shaky capital market? As the media coverage attests, those are not yes/no questions. 'Bailout' is in the eye of the beholder.

Former Fed Chair, Paul Volcker added another question (LATimes blog, LALand):

Why is the Fed rescuing a non-bank [Bear Stearns -- really, Bear Stearns shareholders] that it does not regulate? Isn't that a job for Congress? Why is the Fed guaranteeing bad loans? The Fed regulates -- and lends to -- banks, not investment houses. . . . .

Volcker answers his own question: [T]he government ought to be taking responsibility for that kind of action, not the Federal Reserve, which is an independent agency designed to provide an ample supply of liquidity to the economy but not too much, protect against inflation, not to protect particular sectors of the economy from bad loans.

The Fed is fast-- way faster than Congress. It's fast because its shaded from the relentless glare of CNN cameras and November elections. No need for focus groups and subcommittee hearings. The Fed just does it. Here's what it had to say in a press release posted to its website on March 14:

The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system. The Board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear Stearns this morning.