The key element of the Bear Stearns bailout is a secretive government-backed loan of $29 billion to J.P. Morgan Chase. (It is for $30 billion but JP Morgan is on the hook for the first $1 billion in losses.)
Bear Stearns was clearly bankrupt, but the Federal Reserve’s loan allowed J.P. Morgan Chase to eventually offer $10 a share for the firm. That represents about a $1 billion windfall to Bear Stearns shareholders, who should have been wiped out completely for owning an insolvent investment bank.
- The collateral appears to be mostly mortgage and other real-estate related assets.
- The collateral is not all AAA rated, but includes assets valued all the way down to BBB, which is one notch above “speculative grade.”
- The “majority” of the collateral is already backed by the GSEs. That’s interesting because that part of the portfolio is probably higher quality and there is an implicit government backing of those assets.
- The Federal Reserve is required by accounting rules to report the valuation of the portfolio on an annual basis only.
Why do we care? We’ll keep watching this because it is an insiders’ deal for assets that will probably never be worth $29 billion, and at some point taxpayers may have to write a check.
And, even if this deal works out, it opened the door to the appalling new federal lending window that gives cash directly to other investment banks for impaired assets. More on that to come.