Fed Rescue of Bear Stearns Averted Disaster, CEOs Say
The chief executives of both Bear Stearns and JP Morgan Chase said Bear Stearns could not have been saved without the financial aid from the Federal Reserve, and that failing to rescue it would have been a disaster for the markets and the economy.
JP Morgan CEO Jamie Dimon said "the consequences would have been disastrous" with systematic damage to markets, investment companies, mutual funds, pensions and individual investors.
Dimon was following Federal Reserve Chairman Ben Bernanke and other officials involved in negotiating JP Morgan's takeover of Bear in explaining the deal at a Senate Banking Committee hearing.
He tried to counter the opinion that the Fed's assumption of $30 billion of Bear Stearns's mortgage-backed assets made the takeover a virtual giveaway to his firm.
"We are acquiring some $360 billion of Bear Stearns assets and liabilities," Dimon said. "The notion that Bear Stearns's riskiest assets have been placed in the $30 billion Fed facility is simply not true."
Dimon also disclosed for the first time that the Fed loaned Bear $25 billion through a primary facility.
During his testimony, Dimon described how JP Morgan became involved in an effort to rescue Bear Stearns.
Dimon said Bear Stearns called JPMorgan on the evening of March 13, saying it might not have enough cash to meet obligations the next day and needed emergency help.
JPMorgan then contacted the New York Federal Reserve and learned it was aware of the sitation, Dimon said.
BlackRock, the New York Fed's advisor, designated what Bear Stearns assets would be pledged for the $30 billion collateral pool for the Fed.
"We did not cherry pick the assets in the collateral pool," Dimon said.
The assets taken by the Fed consist entirely of loans that are current and domestic securities rated investment grade, while JPMorgan kept Bear Stearns' riskier and more complex securities for its own account, Dimon said.
The original rescue deal, reached in 96 hours of negotiations between the two companies, the Fed and the Treasury beginning March 13, called for JP Morgan to pay $2 per share for Bear Stearns stock.
Earlier in the hearing, both the Fed and Treasury officials denied reports that they had insisted JP Morgan lower its initial offer from $4 per share.
It has since raised it to $10 per share.
Alan Schwartz, Bear Stearns's chief executive, said that old-style run on the bank that hit his company last month was not because of a lack of capital or liquidity, but because of "unfounded rumors and conjecture." "The impetus was a lack of confidence, not a lack of capital or liquidity," Schwartz said.
"Throughout this period, Bear Stearns had a capital cushion well above what was required to meet regulatory standards," he told the Senators, "However, by Thursday of that week, a tipping point was reached on liquidity."
"The market rumors became self-fulfilling and Bear Stearns' liquidity pool began to fall sharply." In earlier testimony, Securities and Exchange (SEC) Commission Chairman Christopher Cox supported that view.
He told the committee that Bear Stearns more than met the SEC's standards for liquidity.
That meant it had a supply of cash and high quality securities such as Treasuries, a backstop 'designed for a situation in which all of a firms unsecured funding evaporates and evaporates for a period of a year.' What neither Bear nor any regulator envisioned was the possibility that secured funding, even if backed by high quality collateral, would not be available.
But on March 13 and 14, in what Cox called "an unprecedented occurrence," Bear Stearns could not borrow even against the highest quality Treasury securities.
Even if the Federal Reserve had had all of its new lending facilities in place, New York Fed President Timothy Geithner said it is "hard to reach the judgment that it would have delivered a different outcome." Geithner added that the situation actually got worse once the Fed extended credit to Bear, despite the attempt to stabilize the firm with this added liquidity.