Collapse being used to monopolize financial markets


Richard Moore

The financial collapse now in progress was intentionally engineered by the 
Federal Reserve, as was the Great Depression. In both cases, one of the main 
goals has been to concentrate ownership and power into a few elite hands. Here 
we see a good example, as the Fed arranges for JPMorgan Chase to gobble up a 
rival financial institution.


March 17, 2008

Fed Acts to Rescue Financial Markets

WASHINGTON ‹ Hoping to avoid a systemic meltdown in financial markets, the 
Federal Reserve on Sunday approved a $30 billion credit line to engineer the 
takeover of Bear Stearns and announced an open-ended lending program for the 
biggest investment firms on Wall Street.

In a third move aimed at helping banks and thrifts, the Fed also lowered the 
rate for borrowing from its so-called discount window by a quarter of a 
percentage point, to 3.25 percent.

The moves amounted to a sweeping and apparently unprecedented attempt by the 
Federal Reserve to rescue the nation¹s financial markets from what officials 
feared could be a chain reaction of defaults.

After a weekend of intense negotiations, the Federal Reserve approved a $30 
billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the 
biggest firms on Wall Street, which had been teetering near collapse because of 
its deepening losses in the mortgage market.

In a highly unusual maneuver, Fed officials said they would secure the loan by 
effectively taking over the huge Bear Stearns portfolio and exercising control 
over all major decisions in order to minimize the central bank¹s own risk.

The Fed, working closely with bank regulators and the Treasury Department, raced
to complete the deal Sunday night in order to prevent investors from panicking 
on Monday about the ability of Bear Stearns to make good on billions of dollars 
in trading commitments.

In a potentially even bigger move, the Federal Reserve also announced its 
biggest commitment yet to lend money to struggling investment banks. The central
bank said its new lending program would make money available to the 20 large 
investment banks that serve as ³primary dealers² and trade Treasury securities 
directly with the Fed.

Much like a $200 billion loan program the Fed announced last Tuesday, this 
program will essentially allow the government to hold as collateral a wide 
variety of investments that include hard-to-sell securities backed by mortgages.
But Fed officials told reporters on Sunday night that the new program would have
no limit on the amount of money that can be borrowed.

In a conference call with reporters, the Federal Reserve chairman, Ben S. 
Bernanke, said the central bank was moving to provide money to financial 
institutions that need it.

³The Federal Reserve, in close consultation with the Treasury, is working to 
promote liquid, well-functioning financial markets, which are essential for 
economic growth,² he said. ³These steps will provide financial institutions with
greater assurance of access to funds.²

It was unclear just how much risk the Federal Reserve was taking on, especially 
in the bailout of Bear Stearns. But analysts said it was clear that JPMorgan 
Chase was getting an extraordinary bargain, buying Bear Stearns at a tiny 
fraction of its market value just one week ago, and with the Fed shielding it 
from much of the risk.

Fed officials said they would take control of the investment holdings of Bear 
Stearns in order to maximize their value and minimize disruptions as a result of
a cash squeeze. Without providing details, Fed officials insisted that the $30 
billion loan was covered by even the most conservative estimates of the Bear 
Stearns holdings.

Mr. Bernanke spent much of the weekend in his office in Washington, staying in 
constant telephone contact with officials at the New York Fed, which led the 
negotiations with JPMorgan Chase. Mr. Bernanke and board officials in Washington
set the overall parameters for how much risk the central bank was willing to 
shoulder, and they consulted closely with the Treasury Department and its Office
of the Comptroller of the Currency.

But Mr. Bernanke had already been worrying for some time about the collapse of a
major Wall Street bank, and Bear Stearns had been high on its watch list.

Standard & Poor¹s 500 index futures expiring in June fell 2.9 percent on Sunday 
night, signaling a lower opening for United States stock markets on Monday 

Last Tuesday, the central bank announced a $200 billion loan program that would 
allow the nation¹s biggest banks to borrow Treasury securities and post 
mortgage-backed securities as collateral. The financing gave 20 top investment 
banks 28-day loans at what amounted to wholesale rates ‹ at or slightly below 
the Fed¹s benchmark rate on overnight loans between banks.

But the program did little to rejuvenate the credit markets, which have been 
paralyzed by fears about even conservative short-term-debt securities. On Wall 
Street, rumors about a possible collapse of Bear Stearns, which had been a 
leader in packaging mortgage-backed securities, gained gale-force strength.

Monetary policy experts said they were stunned by the sweeping nature of the 
Fed¹s efforts, which they said were unprecedented in a host of different ways. 
But some were doubtful about whether the moves would solve the underlying 
problem of huge losses from bad lending practices.

³Emergency provision of loans is necessary but not sufficient,² said Lawrence H.
Summers, who was a Treasury secretary under President Bill Clinton. ³There is a 
fundamental issue, which is that the financial system is short of capital and is
under pressure to contract.²

Henry M. Paulson Jr., the current Treasury secretary, vigorously endorsed the 
Fed¹s rescue efforts on Sunday and made it clear he was much less worried about 
the ³moral hazard² of bailing out a Wall Street firm than he was about a chain 
reaction of defaults if Bear Stearns were to abruptly collapse.

³The right decision here, I am convinced, was the decision that the Fed made, 
which was to do things, work with market participants to minimize the 
disruptions,² Mr. Paulson said on ³This Week With George Stephanopoulos² on ABC.

Mr. Paulson and two top deputies, Robert Steel and Anthony W. Ryan, stayed in 
Washington rather than participate in person with the talks under way in New 
York. But Treasury officials said they stayed in constant telephone contact with
the New York Fed and with Wall Street executives.

The New York Fed, which runs the Fed¹s daily market operation and has long been 
the Federal Reserve¹s primary channel for dealing with Wall Street, led the 
negotiations with JPMorgan Chase.

The principal issue, according to officials, was how much insurance the Fed was 
willing to provide to JPMorgan Chase in exchange for taking over Bear Stearns 
and its hard-to-quantify assets.

Fed officials were racing to announce an agreement of some sort before financial
markets opened in Asia, which meant reaching a deal on Sunday night. But even as
they worked to engineer a takeover of Bear Stearns, Fed officials were 
canvassing executives at other Wall Street firms that might be in trouble as 

As rumors about problems at Bear Stearns swept across Wall Street last week, Fed
and Treasury officials became convinced that they needed more weapons to help 
struggling investment banks. Although stock investors initially cheered the 
announcement Tuesday of the $200 billion lending program, the credit markets 
showed little reaction ‹ an indication that investors were still dubious about 
the mountain of mortgage-backed securities that companies like Bear Stearns were

Copyright 2008 The New York Times Company

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