Senate Probes Bear Stearns Deal for Taxpayer Risk

Members of the Senate Finance Committee have asked for the full details of the agreement under which JP Morgan Chase will acquire Bear Stearns, including a description of the assets the Federal Reserve will take on from Bear to allow the deal to happen, in order to judge whether the deal poses any risk to US taxpayers.

In a letter sent to the two companies, US Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, and the New York Fed, Committee Chairman Max Baucus of Montana and Republican Member Charles Grassley of Iowa said their committee has jurisdiction over 'bonded debt' of the US, which gives them the authority to fully review the detail.

The letter did not say that the Senate committee had any plans to obstruct or alter the deal, which still appears to be evolving as JP Morgan earlier this week agreed to increase its purchase price to 10 usd per share of Bear Stearns.

However, the senators said they want to know whether the deal poses any downside risk to taxpayers.

"Congress has a responsibility to look at whether the taxpayers will lose money here, what kind of precedent this sets for federal involvement when other firms over-extend themselves, how this will affect the marketplace in other direct and indirect ways, and whether top executives will come out better than the rank-and-file workers who weren't in the room negotiating the deal,'" Grassley said.

Despite the fear that taxpayers might be hit for any losses that result from the deal, the large Federal Reserve system would have to be put at risk of far greater losses before it needed a taxpayer bailout.

However, there is already some worry that this could ultimately happen if more banks or investment houses default due to exposure to mortgage-related securities.

According to details of the agreement released last week, the New York Fed has
agreed to provide $29 billion in financing for the acquisition of Bear .

JPMorgan will bear the first $1 billion of any losses in the portfolio, and any gains will accrue to the New York Fed.

The New York Fed agreed to take on billions of dollars worth of hard-to-value and hard-to-trade mortgage-related securities from Bear as collateral for its financing.

The letter specifically asked for a description of 'all steps taken to date and steps that remain to be taken' to allow the purchase, and a description of all assets that the Fed will secure related to the transaction.

The Senate letter also asked for copies of all documents that will be filed with the US Securities and Exchange Commission related to the transaction, and the names of all negotiators and others who represented the parties in the transaction.