Terry Connelly is dean of the Ageno School of Business at Golden Gate University and is frequently quoted on business, financial, and economic issues by Bay Area local, as well as national, news media.
Is this the week that the Fed destroyed the bear stearns village in order to savbe it — or vice versa?
On Tuesday, the Federal Reserve announced a new, unprecedented arrangement to provide credit in the form of Treasury securities against discounted mortgage-backed collateral of up to $200 billion that would be available to broker-dealers, as distinct from lending to banks through the Reserve Bank’s “discount window” and previously announced and executed special auctions also limited to commercial bank participants.
In retrospect after Friday’s emergency action to provide a loan of undisclosed size to Bear Stearns to keep the firm temporarily afloat through the intermediary of J P Morgan, it seems apparent that the Tuesday plan was designed to help one particular broker-dealer — namely Bear Stearns — to deal with the seriously adverse balance sheet consequences of hedge-fund positioning gone awry in terms of the rapidly-widening spreads between Treasury securities and mortgage-backed issues: ie, it seems that it was the Bear that was holding the bag!
But what if some discerning market participants didn’t really need to wait until Friday to figure that out? And what if these participants, understanding that the first availability of the credit facility announced by the Fed on Tuesday was not to come until the end of this month, smelled enough Bear Stearns blood in the water — as a result of the Fed’s own announcement — to call in their credit lines to that firm in such a fashion that Thursday night’s funding crisis for Bear was the result?
If that is the case, then the Fed woke up Friday to an emergency that it had perhaps itself unwittingly abetted with an all too obviously telegraphed pass that sent a message to Bears’ creditors to “get out while the getting’s good”?
As for Bear Stearns, it now looks like putting a couple billion of the firm’s albeit modest capital into their hedge funds caught in the subprime squeeze last July might have been a cheap price to pay to live to trade another day.
