The Devil and The Details
As expected, Federal Reserve Chairman Ben Bernanke got a grilling today from the Senate Banking Committee over the Bear Stearns takeover. But the hearing only touched a bit on the details of the Fed’s move to engineer the deal, which are becoming increasingly intriguing as we learn more about them.
The Fed only on Tuesday released some details about those nearly $30 billion in loan guarantees it provided. Turns out the securities backing the loan are mortgage backed securities and related hedge investments, according to the Fed’s description. JPMorgan Chase Chief Executive Jamie Dimon denied to the committee today that the Fed had taken on the riskiest securities as collateral.
Maybe not. But Bloomberg columnist Caroline Baum points out that the Fed may have violated its own charter, which doesn’t allow it to own those types of financial products. And she says that in order to hold them, the Fed set up an off-the-balance sheets vehicle, with no capital. Hmm….Aren’t those the things that got investment banks and Enron in trouble in the first place?
You can see the terms for yourself here. If the whole Bear Stearns event didn’t already make you nervous about the Fed and the state of the nation’s financial system, this should do it.