Fed Worried About Its Own Risk During Bear Rescue

The Federal Reserve worried about exposing its balance sheet to credit risks when it launched a lending facility for top bond dealers in an emergency move in mid-March, minutes of two Fed meetings released Friday showed.

The U.S. central bank, which also approved emergency financing to prevent problems at investment bank Bear Stearns from spreading in a domino effect, saw broad financial market problems and evidence other primary dealers could be in trouble too, minutes of a March 16 meeting said.

Many potential investors had been invited to invest in Bear Stearns, but Bear Stearns determined that JPMorgan was the most suitable bidder, the minutes from a March 14 meeting said.

"Board members considered whether six months was an appropriate duration for the facility, and they asked about provisions in the new facility for protecting the Federal Reserve against credit risk,'' the minutes said.

The Fed on March 14 approved special financing to enable JPMorgan Chase to buy Bear Stearns, which faced bankruptcy if it was unable to secure funding.

Alongside the rescue, the U.S. central bank opened access to its discount window to primary dealers in a bid to unstick frozen credit markets. The Fed normally restricted emergency funding for deposit-taking banks, and cited financial market turmoil as justification for making the exception.

"This action was necessary to prevent, correct, or mitigate serious harm to the economy or financial stability,'' the minutes said.

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