Two weekends ago the Fed stepped into the economic spiral offering $30 billion to back the JP Morgan Chase bail out of Bear Stearns. It was touted as a loan to back JP Morgan’s position. Some of us questioned the move, perhaps as much from not fully understanding the deal as in opposition to it. Deals done outside the public eye with public funds is always suspect. The Palm Sunday weekend bail out was one thing. Perhaps the negotiations to raise the stakes from $2.00 a share to $10.00 a share over the Easter weekend gave rise to more than Jesus for some of us.
Senator Chris Dodd has called for an investigation. It seems that the testimony will begin next week. I believe Henry Paulsen will appear before the Congressional hearing on April 3.
Of course, the Fed is still calling the deal a bail out
What the Fed is calling a $29 billion “loan” to help finance JPMorgan Chase’s purchase of Bear Stearns looks much more like a $29 billion investment in securities owned by Bear. Although the Fed insists that it isn’t technically buying any assets, in practical terms it’s doing exactly that. All this adds up to a big and unacknowledged step up in the central bank’s financial intervention with Wall Street investment banks.
That said, flying under the public radar
The 20 primary dealers borrowed $37 billion from the discount window on Wednesday, $8.2 billion more than the previous week. For the entire week, loans to the 20 primary dealers averaged $32.9 billion a day, up $19.5 billion from the previous week.
The discount window has been open to the primary dealers for only the 10 days since the Fed helped rescue Bear Stearns on March 16. The overnight loans carry an interest rate of 2.50%.
The banks borrowed an additional $75 billion from the other Fed program established this month to boost liquidity in the markets. In a new program that lets the big firms swap illiquid mortgage-backed paper for highly sought-after Treasurys, the Fed offered $75 billion to the banks. But the banks submitted bids totaling just $86.1 billion, for a low bid-to-cover ratio of 1.15.
Additionally, there is a full month of printing presses running day and night
All told, the Fed has offered to lend the banks up to $200 billion for 28-day terms. Crescenzi [chief bond market strategist for Miller Tabak & Co.] said the results of the first auction indicate that perhaps not all $200 billion will be needed.
I’m not an economist and would not want to be one during this time in our lives. But, just looking at the numbers, it appears that in addition to the highly commented upon $30 billion, somewhere in the Fed the window is open tossing out another $200 billion in “loans” to other institutions.
Several Fed and administration personnel have said that if money got “short” the Fed would print more. I thought they were talking about the first shot in the arm. How naive of me! The drug of choice for the banks is money, money, and more money and it seems that the Fed is willing to be the junkie for all comers.
So, just how much is this costing us… the taxpayers? It’s only paper, sure. But, those 0’s and commas are beginning to mount up. And, that paper the Fed is printing is going to cost someone something. I’m betting the bill lands on Main Street, not Wall Street.
