When the Fed Gave Up on Bear Stearns

If you have a few minutes to spare, it's worth reading the official background to the JP Morgan - Bear Stearns merger, as filed with the SEC. The bit which jumps out at me is that after throwing Bear a lifeline on the evening of Thursday March 13, the Fed abruptly let go of the rope one day later, and essentially said "you'd better be rescued by JP Morgan, or you're going to die".

During the evening of March 13, 2008, Bear Stearns senior management met with its legal and financial advisors to review the events of the day, the sharp deterioration in its liquidity position, and options potentially available to Bear Stearns. Following this meeting, Mr. Schwartz contacted James Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, to discuss Bear Stearns' liquidity position and seek funding assistance or a business combination...
Ultimately, JPMorgan Chase agreed to provide to Bear Stearns a secured lending facility for an initial term of up to 28 days under which JPMorgan Chase would provide funding to Bear Stearns. JPMorgan Chase's secured lending facility was supported by a non-recourse, back-to-back loan from the New York Fed through its discount window...
During the morning of Friday, March 14, 2008, the board of directors of Bear Stearns met to receive an update from senior management regarding its efforts to identify funding sources and to authorize entry into the proposed secured lending facility from JPMorgan Chase. Later that morning, Bear Stearns issued a press release announcing that it had obtained this secured lending facility and that it was discussing permanent financing and other alternatives with JPMorgan Chase...
On Friday evening, Bear Stearns and JPMorgan Chase were informed by the New York Fed that the New York Fed-backed secured lending facility that had been entered into earlier that day would not be available on Monday morning.

On Friday morning, then, Bear Stearns announced "a secured lending facility for an initial term of up to 28 days"; by Friday evening, they were told that lending facility had already expired and would not even last through Monday. Quite a volte-face by the Fed!

Why did the Fed change its mind so abruptly? It was clearly a successful attempt to force Bear Stearns into a deal with JP Morgan - and it equally clearly allowed JP Morgan to simply name the acquisition price ($2 per share), since Bear was no longer viable as a going concern.

Of course, there's a huge story hidden in the passive voice in the official narrative. Bear "were informed by the New York Fed"? Well, that's one way of putting it. Another way would be to say "Tim Geithner decided that he didn't want to risk Bear Stearns dragging down the market for the next 28 days, so he cut off their air supply and forced them into a shotgun marriage with JP Morgan". But then again, that's not the kind of language one normally finds in SEC filings.

(Via Equity Private)