Fed Shifts Risk From Bear Sterns to Taxpayers
The Federal Reserve, apparently not satisfied with dumping the bad debt held by banks on the taxpayers, has invoked a little-used law to shift the bad debt held by a non-bank to the taxpayers as well.
From Bloomberg.com:
March 14 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke invoked a law last used four decades ago to keep Bear Stearns Co. from collapsing after the securities firm approached the central bank for emergency funding.
The loan to Bear Stearns required a vote today by the Fed’s Board of Governors because the company isn’t a bank, Fed staff officials said. The central bank is taking on the credit risk from Bear Stearns collateral, lending the funds through JPMorgan Chase & Co. because it’s operationally simpler to accomplish than a direct loan, the staff said on condition of anonymity.
Bernanke took advantage of little-used parts of Fed law, added in the 1930s and last utilized in the 1960s, that allows it to loan to corporations and private partnerships with a special Board vote. The Fed chief probably sought to stave off a deeper blow to the financial system from a Bear Stearns collapse, former Fed researcher Keith Hembre said.
Just three days ago, the Fed promised up to $200 billion in loans to banks also agreeing to take their bad loans as collateral. That news sent the stock market soaring over 400 points. Today’s news sent the stock market and the dollar down and saw gold trading solidly above $1,000 ounce for the first time in history.
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