Why the Federal Reserve's 'loan' for the Bear Stearns deal looks like an investment—and faces serious scrutinyThe Federal Reserve has stretched its mandate up, down, and sideways to prevent a financial market deluge. Now it appears to be stretching the English language a bit as well. What the Fed is calling a $29 billion "loan" to help finance JPMorgan Chase's (JPM) purchase of Bear Stearns (BSC) 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.
The Fed, of course, is the only part of government with the speed, power, and flexibility to arrest a bout of market panic. By rapidly intervening in mid-March to keep Bear from filing for bankruptcy, it may well have prevented a series of cascading failures that could have severely damaged the financial system and the economy. Many economists and analysts are happy that the Fed stepped into the breach. Nevertheless, now that things have quieted down a bit, the Fed is likely to face some tough questions about the precise nature of its actions as well as the legal justification for them.
The second-guessing has already begun. On Mar. 26, Senate Banking, Housing, and Urban Affairs Chairman Christopher Dodd (D-Conn.) announced an Apr. 3 hearing to explore the "unprecedented arrangement" between the Fed, JPMorgan, and Bear. Top officials from the Fed and other regulators, as well as Bear Stearns CEO Alan Schwartz and JPMorgan CEO Jamie Dimon, will likely be grilled about the details.
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