One of Wall Street's most aggressive--and admired--firms got their booties saved today by actions taken by the Federal Reserve System acting in conjunction with JP Morgan Chase Bank.
On the Street, once the other firms lose confidence in a firm's ability to perform on its trading commitments, most of which are made by two people from two firms talking on the telephone--no written contracts--the suspect firm is doomed. Who's going to make deals with a firm they may be out of business before the trade even "settles?" Nobody.
The Street lost confidence in Bear, Stearns (BS) and other firms would no longer trade with them.
BS is BIGTIME, the second largest player in mortgage-backed securities, next to Lehman Brothers. BS could not be allowed to wither up and die, not without a fight.
So the Fed used its most powerful and rarely employed tool--which I won't describe in detail here--to give the boys over at Bear at least a 28-day extension of their existence.
Of course, the poor slob who is about to have his house taken away by foreclosure gets no such individual attention. He either pays-up or gets the boot. He can fail; Bear, Stearns can't.
Yes, the scenario reeks of unfairness. Yet it is justifiable in a macro-economic sense.
The real problems are that the BS-bailout is unlikely to save the firm from extinction, merely to delay it; and that the Fed has found itself in a position of having insufficient data to accurately anticipate what is yet to come from the Depression in the Housing Market.
This Depression has been apparent to those in the real estate biz for quite some time. Yet the Fed could not seem to even see, yet alone connect, the dots that inter-relate the housing market and the explosion in shaky mortgage-backed securities to the rest of the economy.
The Fed believed to problems could be "contained" within the housing market itself, much like Saddam's ambitions to rule the entire Middle East could. The Fed was wrong. The Fed slept as the housing market collapse extended its tentacles to other sectors of the economy.
Now we have Time bombs waiting to explode all over the economy, particularly in the Banking/Finance sector. BS is small change compared to what lies ahead.