The Real Story

I'm really pissed at the media referring to the "Fed bailout of Bear Stearns."

Bear Stearns was NOT bailed out. Nobody at the firm got a single penny of the $30B put up by the Federal Reserve. That money is meant to cover potential losses to JP Morgan on riskier, illiquid assets. JP Morgan along with Bear's clients and transactional parties were the ones bailed out.

The reality is that Bear handles trillions of dollars each day in the financial system. From investment accounts, funds, and brokerage services, to financial advising, to clearing houses, from credit swaps and nightly repos to positions held in various areas, the firm is tied via thousands of deals and contracts to other banks, individuals, and organizations.

The motivation behind the Fed's buyout push and its monetary guarantee was to prevent the collapse of these relationships, not to reward Bear Stearns. Whether this was appropriate is a separate debate. The point I'm trying to make here is that most people think Bear Stearns was saved by the Fed's action, but that is not true.

JP Morgan made out like a bandit, even with the new $10/share price and the unknown liabilities they inherited ($30B of which are being assured by the Fed...even better for them). Investors who have accounts with the firm were bailed out. Assets held by Bear were protected. Those who loaned to Bear, had bonds issued by Bear, depended on Bear for positions and trades, were bailed. Contracts and deals were retained, business operations were allowed to continue.

However, the company itself is smoke. Once the deal closes, JP Morgan can do whatever they want with all the assets. The folks at Bear Stearns would have no control over anything that happens; they would be at the mercy of the new owner. Of course, one hopes JP Morgan takes a collaborative approach and includes former Bear management in any decisions, and one hopes they are sensitive to employee concerns and make wise financial determinations. But that is entirely up to them.

The fact of the matter is that Bear Stearns would no longer function as its own company. It wasn't saved, it was swallowed whole by another entity who then would direct all its operations. I wouldn't call that a bailout. Not at all.