If the crisis turns out to be a genuine solvency issue, the Fed would then have time to analyze the assets and determine whether the situation was so dire that a public bailout would be necessary.

Counterparties might even gain confidence in the entity with the potential for a Fed, deep pocket, takeover.

I wonder if Bear was hit by the “Carlyle Capital effect”. The TSLF probably had the perverse effect of killing Carlyle Capital, the exact opposite of what was intended (Robert Peston @ BBC, via Alea). The TSLF gave creditors every incentive to seize Carlyle Capital’s collateral in order to present it at the Fed window in exchange for “lovely liquid Treasuries”, something which Carlyle Capital itself couldn’t do. Bear, on the other hand, is allowed to use the TSLF… but the TSLF doesn’t go live until March 27.

This suggests two things: first, the Bear bailout is much less significant than meets the eye, because it’s just a Bear-only jumpstart to the TSLF which would have saved Bear anyway. In other words, it’s nothing really new or different from the TSLF itself.

And secondly, an awful conspiracy theory presents itself: were Bear’s creditors trying to deliberately hasten its demise (a la Carlyle) before Bear could take advantage of the TSLF, so they could grab Bear’s collateral and turn it into desperately needed liquidity for themselves?

Bernanke must be truly annoyed, because today’s Bear debacle rather spoiled the carefully orchestrated impact of the TSLF rollout. Perhaps he needs to send an envoy to Bear’s creditors to softly suggest to them to never, ever do such a thing again.

I hear Eliot Spitzer is looking for a job…

Let me just conclude by saying that the terms of the rescue package engendered by the Fed also raise troubling questions of financial concentration and antitrust. As a group working together, the new owners can have a greater impact on markets than in competition with one another. In this regard, it should be understood that the Fed’s unprecedented extension of the too-big-to-fail doctrine to a hedge fund does not insulate the fund and its new owners from the constraints of the Sherman and Clayton acts.

The bailout may involve a tendency toward concentration that the Justice Department has an obligation to review.

HEDGE FUND OPERATIONS

THURSDAY, OCTOBER 1, 1998
U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

http://commdocs.house.gov/commit…/ hba51526_0.HTM

The reason I said it would have been good for Bear to fail was two-fold, The first was moral hazard. However, now that it looks pretty certain that Bear is not going to survive as an independent firm, and may well be liquidated on an orderly basis, a la LTCM, pretty much eliminates the moral hazard issue.

However, we still have the second problem that this is still relatively early in the underlying mortgage crisis. We simply won’t know how bad the defaults and recoveries will be until at least well into 2009, perhaps later. But the wheels have already started coming off the financial system. It has a lot more shocks to endure before we are through this mess.

The Education of Ben Bernanke
http://www.nytimes.com/2008/01/20/magazine/20Ben-Bernanke-t.html?_r=1&pagewanted=8&oref=slogin

Soon after Bernanke’s speech in May, two hedge funds organized by Bear Stearns reported huge mortgage-related losses. Credit markets were suddenly jittery. When the committee met on Aug. 7, many expected it to give markets a little relief by easing the fed funds rate, then at 5.25 percent.
On Friday, Aug. 10, the New York Fed pumped $38 billion into the markets, several times as much as on a normal Friday. Meanwhile, some of the governors, as well as William Dudley, a former Goldman Sachs economist and now the markets chief of the New York Fed, were canvassing C.E.O.’s, bank executives, traders and the like. Warsh, who was dialing contacts from his Wall Street days, was alarmed by what he heard. A source he described as a “hedge-fund billionaire” told him that credit assets weren’t trading; people didn’t want them at any price. “Markets weren’t functioning,” he says. “That is very dangerous for a central banker to hear.”

Guess Warsh as a Wall Street connection is kinda in doubt here?

Hmmm! They went after Grasso for his compensation. I wonder if the same will happen for the IBs.

Should shareholders’ lawsuits proceed, the discovery process could reveal very interesting things indeed.

I think the point about bonuses cannot be shouted loudly enough. The bonuses paid for 2007 were criminal. The IBs knew it, but the pigs that they are couldn’t refuse one last gulp at the trough.