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Bear May Have Survived If Fed Acted Earlier
Topic Started: Apr 3 2008, 04:51 PM (128 Views)
Dandandat
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Time to put something here
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Bear May Have Survived If Fed Acted Earlier, CEO Says (Update2)

By Jesse Westbrook and Yalman Onaran

April 3 (Bloomberg) -- Bear Stearns Cos. Chief Executive Officer Alan Schwartz said the fifth-largest U.S. securities firm may have survived if the Federal Reserve had acted earlier to lend money directly to investment banks.

Schwartz discussed such a change in Fed lending rules with Senate Banking Committee Chairman Senator Christopher Dodd at a meeting ``some months ago,'' the senator said at a congressional hearing today where Schwartz testified. Dodd didn't say whether the idea was proposed to the central bank then.

The Fed agreed to provide emergency funding to New York- based Bear Stearns on March 14 after a run on the company put it on the verge of bankruptcy. Two days later, after brokering an agreement for JPMorgan Chase & Co. to buy Bear Stearns, the central bank said it would start lending to securities firms directly for the first time since the Great Depression.

``I do believe that as a policy measure, had the discount window been opened to investment banks for their high-quality collateral, I think it is highly, highly unlikely in my personal opinion that we would be in the situation we find ourselves in today,'' Schwartz told members of the Senate Banking Committee.

Schwartz said the Fed's rescue effort on March 14 didn't help, partly because it singled out the firm in trouble, which exacerbated the panic about Bear Stearns. Even if the Fed had then let investment banks borrow from the central bank directly, it may have been too late to save his firm, Schwartz said.

Didn't Seek Capital

Bear Stearns didn't seek new capital to strengthen the firm as markets were under pressure because it didn't have the billions of dollars in writedowns some competitors did, Schwartz said. Analysts, including David Hendler of Creditsights Inc., have suggested such a move may have pre-empted the concerns about Bear Stearns's financial health.

Citigroup Inc., Merrill Lynch & Co. and 15 other financial institutions have raised more than $142 billion of fresh capital since July.

Schwartz agreed to sell Bear Stearns to JPMorgan for a fraction of its value last month. The run on his firm happened because false rumors were spread, Schwartz said.

``It looked like there were people that wanted to induce panic,'' Schwartz told the Senate panel. ``There are lots and lots of reasons why people can have a financial motivation to induce panic.''

Investments banks' ability to borrow directly from the Fed should become permanent to prevent similar runs, Schwartz said. Because the barriers between commercial banking and investment banking were removed with the repeal of the Glass-Steagall Act in 1999, securities firms need to have the same access as commercial banks do, Schwartz said.

http://www.bloomberg.com/apps/news?pid=206...1v4c&refer=home



Don't you just hate it when people blame the goverment for their problems? What do these people want? A goverment who takes care of their every need, blows their nose for them and helps pull up their paints after they use the potty?

What ever happened to personal resistibility? If your company invested itself into the ground why not simply say your sorry instead of looking for someone else to blame.

Free market capitalists :rolleyes: their all alike, always have their hand out. ;)
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Dandandat
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Time to put something here
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[url=Fed Officials Defend Rescue of Bear Stearns]Fed Officials Defend Rescue of Bear Stearns [/URL]

A top Federal Reserve official told a Senate committee on Thursday that Washington must increase its regulation of Wall Street in order to prevent other banks from needing rescues similar to the one at Bear Stearns.

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CNBC Video: Bernanke | Geithner | Dimon | Schwartz
Text of Prepared Testimony: Ben S. Bernanke | Timothy F. Geithner | Robert SteelThe official, Timothy F. Geithner, the president of the Federal Reserve Bank of New York, called for a simpler, more stringent supervision over financial institutions and urged banks to put in place more fail-safes to prevent the liquidity problems that claimed Bear Stearns last month.

The recommendations were vague and came at the close of an often-gripping testimony from Mr. Geithner, who recounted the weeklong process by which the Fed mediated the fire sale of Bear Stearns to its Wall Street rival, JPMorgan Chase.

Mr. Geithner testified Thursday morning before the Senate Banking Committee at a hearing called to examine the collapse of Bear Stearns and its implications for taxpayers, regulators and future financial crises. The hearing comes as Washington begins to consider how to modernize a hodgepodge of banking regulations. Some critics have said poor regulatory oversight was at least partly to blame for the subprime mortgage problems.

Lawmakers spent much of the morning grilling regulators on the details of the bailout and especially the possibility of “moral hazard,” where risk-takers are emboldened by escaping punishment for their bad bets.

Mr. Geithner spoke alongside Ben S. Bernanke, chairman of the Fed, who again defended the central bank’s unprecedented move to stave off a collapse of Bear Stearns.

“We judged that a sudden, disorderly failure of Bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy,” Mr. Geithner said in his remarks, adding that stock markets and home prices could have fallen significantly in the event of a collapse.

“Absent a forceful policy response, the consequences would be lower incomes for working families, higher borrowing costs for housing, education, and the expenses of everyday life, lower value of retirement savings, and rising unemployment,” Mr. Geithner said.

Mr. Geithner added that a lack of response from the Fed “would in effect have penalized” other businesses and banks that had “behaved more prudently” than Bear Stearns.

That justification was echoed in testimony by the other witnesses at Thursday’s hearing, including Robert Steel, Treasury under secretary for domestic finance, and Christopher Cox, chairman of the Securities and Exchange Commission.

“Our focus was not on this specific institution, but on the more strategic concern of the implications of a bankruptcy,” Mr. Steel said. “The failure of a firm that was connected to so many corners of our markets would have caused financial disruptions beyond Wall Street.”

All the hearing participants emphasized the dramatic nature of the situation they found themselves facing on March 13, when executives at Bear Stearns first informed financial regulators that the bank, one of Wall Street’s biggest, was facing imminent bankruptcy. What followed was a whirlwind weekend of round-the-clock negotiations during which, regulators said, the fate of the nation’s financial system hung in the balance.

“Everybody is rediscovering and re-thinking through what they think is adequate liquidity,” Mr. Geithner said, noting that the Fed was forced to take an ad hoc approach in its triage efforts. “Almost nothing is typical about the arrangement we reached in this context.”

Mr. Geithner also said that the Fed “did not set, or negotiate” the $2-a-share price that JPMorgan agreed to pay to purchase Bear Stearns. (The price was later raised to $10 a share.)

“In the cauldron of these events,” Mr. Cox said, “the actions that the Federal Reserve took — in particular, extending access to the discount window not only to Bear Stearns, but also to the major investment banks — were addressed to preventing future occurrences of the run-on-the-bank phenomenon that Bear endured.”

The regulators were joined by two major players: Alan D. Schwartz, the chief executive of Bear Stearns, and James Dimon, chief executive of JPMorgan Chase.

Mr. Schwartz said he was “saddened” by the events that had led to his firm’s collapse, and he reiterated his claim that Bear Stearns had enjoyed a strong level of liquidity up until the day before its collapse. He blamed unsubstantiated rumors for the sudden drop in confidence in Bear.

“There was, simply put, a run on the bank,” he said.

Mr. Schwartz added that Bear Stearns executives were not directly involved in JPMorgan’s negotiations with the Fed about the $30 billion credit line. But he admitted that Bear’s management team had to take some responsibility for the debacle.

In his testimony, Mr. Schwartz occasionally sounded plaintive, as if he were still trying to digest the reality of his firm’s collapse. “I never dreamed it would be as rapid as the thing that happened here,” he said at one point. “I never understood or dreamed it would happen as rapidly as it did.”

Mr. Dimon, who was frequently praised by his peers for obtaining a major rival at a rock-bottom price, said in his testimony that his bank would not have gone through with its takeover of Bear Stearns without the Fed’s guarantee of a $30 billion credit line.

“While we wanted to help,” Mr. Dimon said, “and I believe we were the only firm ultimately in a position to help, we had to protect the interests of our shareholders.”

He said that the collateral offered to the Fed for the loan consisted of “investment grade” assets, and not the riskier batch of mortgage-backed securities and other soured assets held by Bear.

“We did not cherry pick the assets in the investment pool,” Mr. Dimon said in his remarks.

Mr. Bernanke, in a brief statement, repeated much of his Congressional testimony on Thursday, noting that the economy would probably slow significantly in coming months in the wake of rising unemployment, plummeting home values and a continued clampdown on credit.

“Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year,” Mr. Bernanke said.

He also noted that the Fed’s actions to restore liquidity in the credit markets were intended “to improve the functioning of financial markets and to limit any adverse effects of financial turmoil on the broader economy.”

http://www.nytimes.com/2008/04/03/business...87eb&ei=5087%0A


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ds9074
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Admiral
What gets me is that the people now criticising the Fed, and we have them here criticising the Bank of England on the same grounds, for not providing them with enough support are the very same people who when the going is good argue for low taxes on their business and laid back government regulation.

Basically the story is let the market be free to make as much money as possible when the going is good but get the government to bail them out when they are loosing money.

Well sorry but thats unacceptable. Either they are going to have to accept more controls on what they do to prevent a reoccurance or they should be prepared to practice what they always put in the small print - the value of your investments (and businesses) can fall as well as rise.

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Dandandat
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Time to put something here
ds9074
Apr 3 2008, 06:09 PM
What gets me is that the people now criticising the Fed, and we have them here criticising the Bank of England on the same grounds, for not providing them with enough support are the very same people who when the going is good argue for low taxes on their business and laid back government regulation.

Basically the story is let the market be free to make as much money as possible when the going is good but get the government to bail them out when they are loosing money.

Well sorry but thats unacceptable. Either they are going to have to accept more controls on what they do to prevent a reoccurance or they should be prepared to practice what they always put in the small print - the value of your investments (and businesses) can fall as well as rise.

There to big to fall ;)

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Mr. Schwartz added that Bear Stearns executives were not directly involved in JPMorgan’s negotiations with the Fed about the $30 billion credit line. But he admitted that Bear’s management team had to take some responsibility for the debacle.


At least they are willing to take "some" responsibilty how humble of them :rolleyes:
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somerled
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Admiral MacDonald RN
Any substance in the claims of insider trading with regards to some executives and board members of Bear just before the company fell over ?

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Dandandat
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Time to put something here
somerled
Apr 4 2008, 12:14 PM
Any substance in the claims of insider trading with regards to some executives and board members of Bear just before the company fell over ?

You would have to provide the claims.

But with out knowing what your talking about, Id say based on the events of the situation "insider trading" would have been a very difficult feet. The collapse happened very quickly and was very public right from the beginning. Based on the information I have read one of the biggest mistakes the executives of company made was not realizing how bad things where getting before it was to late. This kind of precludes the idea of insider trading, no this is just a story of bad management nothing more.

Now did the executives try to sell their share and withdraw their own money on the days of the collapse? I'm sure at lest some of them did, but that’s not insider trading as they where acting on the same impulse everyone else was which caused the collapse.
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