Corporate Welfare Bear

The Federal Reserve decision to underwrite and guarantee $30 billion of Bear Stearns securitized mortgages for the fire-sale of the firm to JP Morgan was nothing short of a corporate welfare stamp of approval by America’s Central Bank of the irresponsible short sighted lending practices of greedy bankers ─ to prevent Bears collapse that will have a domino effect on other major financial institutions ─ and their greedy short-sighted bankers.

There is a real problem when the next day investment bank giants Lehman Brothers and Goldman Sachs report profits down 50%-60% from the previous year ─ and the market rallies. It is a problem that is received with a sigh of relief in the wake of Bear Stearns $2 a share fire sale. The company corporate headquarters is worth more than $1.2 billion, yet Bear was sold for a mere $236 million and a $30 billion guarantee from the Fed as a sweetener. It confirmed its multi-billion dollar mortgaged backed securities portfolio ─ like that of many other investment banks ─ is worth zero.

If Bear Stearns, a company that has been independent in the true American capitalist way for 85 years, survived the Great Depression, was valued at $20 billion in January 2007, and made a fortune in mortgage-backed securities has to be bailed out of bankruptcy, how many more stellar U.S. household name financial institutions will be put on the Bear corporate welfare program before they are cut off and allowed to lose it all like the foreclosed homeowners they profited from? Why doesn’t the government do the same for the dispossessed homeowners?

The Fed’s decision to bail Bear Stearns, lend $200 billion to investment banks, $100 billion in credit lines for banks and other financial institutions, that is pump over $300 billion of taxpayers reserves to prop up investment banks in the fast melting financial markets, merely delayed the collapse of the bear market as the Fed signifies a significant shift in policy and raises the question why aren’t investment banks and hedge funds subject to more stringent regulation? It is time all financial institutions capital and collateral requirements, and regulatory oversight, are overhauled. By throwing out its longstanding rule about lending only to commercial banks and extending this facility to investment banks, the Fed is admitting it was asleep at the wheel as the entire financial system went into meltdown mode before the Fed realized that long-term illiquid assets are not sustainable in short-term money markets ─ and the Fed has became a corporate welfare mom to avoid a global financial meltdown because of its late wake up call.