Geithner Explains the Bear Stearns Rescue

Tim Geithner has shed some small amount of light today on exactly what the assets are that the Fed is financing as part of JP Morgan's acquisition of Bear Stearns. He doesn't give a detailed breakdown: since BlackRock is in the process of (very) slowly liquidating those assets, it makes sense for the list to be kept reasonably confidential. But this was interesting to me:

The assets were reviewed by the Federal Reserve and its advisor, BlackRock Financial Management. The assets were not individually selected by JPMorgan Chase or Bear Stearns.

In other words, this is not $30 billion of nuclear waste that JP Morgan specifically did not want on its balance sheet. Instead, it was simply a question of there being too much in the way of Bear Stearns assets for JP Morgan to comfortably absorb them all over the course of a single weekend. Here's Geithner's Congressional testimony:

On Sunday morning, executives at JPMorgan Chase informed us that they had become significantly more concerned about the scale of the risk that Bear and its many affiliates had assumed. They were also concerned about the ability of JPMorgan Chase to absorb some of Bear's trading portfolio, particularly given the uncertainty ahead about the ultimate scale of losses facing the financial system.

The key phrase here is "the scale of the risk" - we're talking quantity of assets, more than level of impairment.

In general, I'm impressed by Geithner's testimony: while he necessarily elides quite a lot of the nitty-gritty, he makes the big themes clear and reasonably compelling. If this was a bailout, it was a bailout of the entire financial system more than it was of Bear Stearns in particular. And that is precisely what the Federal Reserve in general, and the New York Fed in particular, was designed to do.