PrintMay 22, 2008
Ex-Treasury Department Economist Says Bear Bailout was for JP Morgan
Another credible source is suggesting the Bear Stearns blowout was in fact a bailout of JP Morgan Chase. Joseph Mason a former economist at the Comptroller of the Currency, and noted scholar of restructuring failed banking systems, bank distress, and governmental bailouts.
Mason says the Fed bailout of Bear Stearns on March 17 was motivated, in part, by a desire to keep the larger banking system from collapsing.
Quoted at length in an article from yesterday's Bloomberg News Mason says,
"The Fed was concerned that banks might not have the money to pay CDS counterparties if there were large debt defaults. The Fed's fear was that they didn't adequately monitor counterparty risk in credit-default swaps -- so they had no idea of where to lend nor where significant lumpy exposures may lie.''
As has been widely reported the biggest counterparty of all is none other than JPMorgan itself, the largest seller and buyer of CDSs. The Fed negotiated the deal to bail out Bear Stearns by allowing JPMorgan to buy it for $10 a share. The Fed pledged $29 billion to JPMorgan to cover any Bear debts.
"The sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets,'' Fed Chairman Ben S. Bernanke told Congress on April 2. ``It could also have cast doubt on the financial positions of some of Bear Stearns's thousands of counterparties.''
Mason said, "The Fed was worried about the biggest players in the CDS market," adding, "It was a JPMorgan bailout, not a bailout of Bear,''
Bloomberg contacted JPMorgan spokesman Brian Marchiony and he declined to comment for this article.
This corroborates earlier reports from a well known listed options authority that suggested this scenario as well Dr. Robert Solomon of NYU's Stern School
Pretty soon I'll be able to claim a consensus of economists, accountants, and lawyers believe that it was a JP Morgan bailout, just like Al Gore and global warming. Only with more justification.
