Rescuing the Bear: why and why this way?

March 14, 2008

By Willem Buiter Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.


First, I have to declare an interest. I am a part-time Adviser to Goldman Sachs International. The views and opinions expressed in this blog are my own. They do not represent the views of Goldman Sachs International.

With a little help from its friends, especially JP Morgan, Bear Stearns, one of the 20 Primary Dealers (in US government securities) and one of 30-odd prime brokers, is now borrowing at the Fed’s primary discount window. Bear Stearns cannot do so itself, because it is not a deposit-taking institution entitled to access the Fed’s discount window. JP Morgan has access to the Fed’s discount window, so Bear Stearns is, indirectly through the good (and no doubt adequately remunerated) offices of JP Morgan, engaged in collateralised borrowing from the Fed. The loan from the Fed to JP Morgan is non-recourse and the JP Morgan to Bearn Sterns leg is part of a back-to-back arrangement, that is, it is a loan from the Fed to Bearn Stearns via a bank, JP Morgan. The non-recourse bit means that if Bear Stearns defaults on its loan to JP Morgan, JP Morgan does not have to repay its loan to the Fed. It is, effectively, a collateralised loan on discount window terms, from the Fed to Bear Stearns.

This means that Bear Stearns can take advantage of two of the key relaxations in the terms of discount window access introduced by the Fed at the beginning of the current crisis on August 17, 2007: the extension in the duration of the loan to 28 days (from the original overnight maturity), and the reduction in the ‘penalty’ spread of the discount window borrowing rate over the target for the Federal Funds rate to 50 basis points (from the original 100 bps).


The Federal Reserve Act (1913) allows the Federal Reserve to lend, in a crisis, to just about any institution, organisation or individual, and against any collateral the Fed deems fit. Specifically, if the Board of Governors of the Federal Reserve System determines that there are “unusual and exigent circumstances” and at least five (out of seven) governors vote to authorize lending under Section 13(3) of the Federal Reserve Act, the Federal Reserve can discount for individuals, partnerships and corporations (IPCs) “notes, drafts and bills of exchange indorsed or otherwise secured to the satisfaction of the Federal Reserve bank…”.

The combination of the restriction of “unusual and exigent circumstances” and the further restriction that the Federal Reserve can discount only to IPCs “unable to secure adequate credit accommodations from other banking institutions”, fits the description of a credit crunch/liquidity crisis like a glove. So why hasn’t the Fed declared “unusual and exigent circumstances” yet, so non-deposit-taking financial and other institutions in need of liquidity and blessed with eligible collateral can go directly to the discount window? When in doubt, leave the middleman out.

Why bail out Bear Stearns?

Public institutions like the Fed should support the provision of public goods and services that would not be provided optimally by the market. Markets - arrangements for bringing together would-be buyers and sellers of a good or service to engage in voluntary exchange - have some of the features of a public good. The attractiveness to any potential participant to actually participate in a market by searching for the highest bid price for something he has to sell or the lowest offer price for something he wishes to buy is increasing in the number of participants already in the market. This network externality makes for ‘thick market’ effects but can also result in equilibria where few buyers and sellers are active because everyone expects few buyers and sellers to be active - illiquid markets.

When a key financial market is caught in such an illiquid markets equilibrium trap, the central bank can and should, by acting as Market Maker of Last Resort, break the deadlock by standing ready to buy the illiquid securities. There is a prima facie case for the Fed supporting systemically important financial markets or instruments. To minimize moral hazard it should do this at a punitive valuation of the security, and with an appropriate further liquidity haircut imposed on that punitive valuation.

While the Fed, like any public institution, should support institutions and arrangements with public goods properties, like markets, it should not as a rule support private businesses, even when these private businesses are misleadingly called financial institutions. The Fed should support individual businesses only if failing to do so threatens serious negative externalities. In the financial field these externalities often are through contagion effects, as in the case of the classical bank run by depositors exercising their right to withdraw their deposits on demand on a first-come-first served basis. In financial markets, contagion manifests itself as a withdrawal of willing buyers of securities from the market, motivated by escalating risk aversion, fear or panic, which may be partly rational and partly irrational.

The Fed does not normally offer rediscounting facilities, even indirectly, when a ball-bearings manufacturer in Cleveland, Ohio is about to go under. The reason it has special liquidity facilities for certain kinds of deposit-taking financial institutions is that these institutions are deemed systemically important. For the same systemic financial stability reasons, such institutions are often bailed out when they are not just illiquid but also insolvent.

Deposit-taking institutions are deemed to fall into this category because they are an important part of the retail payment mechanism. Other institutions are deemed too systemically important to fail because they play a key role in the wholesale payments, clearing and settlement system.

Finally, some institutions are provided with liquidity on non-market terms or bailed out when they are insolvent because it is feared that their failure would trigger a chain-reaction of contagion effects. Fear and panic would spread through the markets and first illiquidity and then insolvency would threaten institutions that would have remained both solvent and liquid but for the failure of this ‘focal institution’.

How does Bear Stearns line up according to these three criteria for special Fed attention? Bear is not a deposit-taking institution. It plays no role in the retail payment mechanism and is of no systemic significance to the proper functioning of the wholesale payments, clearing and settlement system. At least Northern Rock, which was a deposit-taking institution, had a role in the retail payment mechanism.

Supporting a market can mean supporting a private business, if the private business is the market. Bearn Stearns, however, isn’t a significant share of the market for any security it holds. It is too small to be of intrinsic systemic significance. Bear Stearns is a medium-sized investment bank - the fifth largest in the USA.  At the end of 2006, its assets were US$350bn. Compare this with Northern Rock whose assets in July 2007 were about £120bn, that is US$240 bn.

Northern Rock was therefore rather larger, compared to the UK economy, than Bear Stearns is relative to the US economy (measured relative to GDP, say, or relative to the size of the banking sector). If decent deposit insurance, of the kind available in the US (up to $100,000) had been available in the UK, there would have been no reason to provide a purpose-built ‘liquidity support facility’ to lend to Northern Rock. Once the government had guaranteed not just all of Northern Rock’s retail deposits but also wholesal deposits and many other unsecured creditors, there was no reason to support Northern Rock any further. A fortiori, the case for official financial support for Bear Stearns looks weak to the point of terminal anaemia.
What about the contagion argument? I already noted that Bear Stearns is not a very large investment bank. Without depositors, it also cannot trigger a run on its deposits, a la Northern Rock, which could have inspired depositors in other deposit-taking institutions to make a run for their money.

Without official assistance, Bear Stearns would probably have had one final desperate go at survival, by selling as many of its assets as it could as fast as it could to raise liquidity. In thin, illiquid markets, this could have caused the prices of the assets they were selling to be come artificially depressed. This argument is correct, but it is an argument for intervening to support the markets for the securities that Bear Stearns would be dumping in its survival-oriented fire sale, not for an individual institution-specific dedicated lender-of-last resort facility.

On what terms should Bear Stearns have been bailed out?

While the bail-out of Bear Stearns is still a very young, thus far at any rate I have heard not a single convincing argument for why this financial business should be assisted by the Fed, rather than the ball bearings company in Cleveland, Ohio. But given that a rescue was decided, what should be the financial terms of the rescue? The exercise is dripping with moral hazard. How can moral hazard be minimized?

It is a good principle that the Fed should, when acting as lender of last resort, make sure that when it supports an individual private business, it gives no comfort to the shareholders of that business, other than whatever comfort is the unavoidable by-product of the achievement of the objectives of the rescue. I take it that the objectives of the Fed in undertaking this rescue were either to ensure the continued existence of Bearn Stearns as a going concern, or an orderly winding down of the firm and its activities, whether by sale to a third party or by its break-up and the sale of its assets.

Preserving any shareholder value for the existing equity holders is not necessary to meet either of these objectives. The fact that the Fed had to come in to rescue the investment bank suggests strongly that without the official financial assistance, Bear Stearns would not have been able to meet its financial obligation. Without the Fed intervention, Bearn Stearns would have defaulted on some of its obligations coming due. Defaulting enterprises go into insolvency administration. The presumption is that the shareholders are last in the line of claimants on the revenues obtained from the realisation of the firm’s assets.

Since Bear Stearns is not a deposit-taking institution, and appears to be of no other systemic significance, there is no need for a special resolution regime of the kind managed by the FDIC for troubled deposit-taking institutions. The firm could have been left to go into receivership.

If the Fed fears the risk of contagion effects and financial panic, it could have requested the nationalisation of the investment bank. This should have been done at a zero price. The existing shareholders could, if the US government were feeling generous, be granted the privilige of claim on whatever value is left after all other creditors have been paid off.

But the shareholders of Bear Stearns are eating their cake and having it. Shares may have dropped 43 percent in value, but what is left still beats nothing. And nothing seems the only possible fair value for what Bear Stearns would be worth without Fed assistance. Why was Bear Stearns not taken into public ownership, preferably at a zero price?

One would hope that, as soon as the rescue was announced, the existing management and board of Bear Stearns would have resigned en-masse, and without any golden handshakes of the CEO of Citigroup and Merrill Lynch -variety. This should have been a condition of the loan being made. The argument that only the existing management understands the business well enough to see it through the storm is unconvincing, as these are the very people that screwed it up in the first place. Why are the old top management and board members still in their jobs?

Another key issue concerns the terms on which Bear Stearns now borrows. I have always considered the Fed’s decision to lower the spread between the discount rate and the Federal Funds target rate to be a mistake - an inframarginal subsidy to those lucky enough to have access to the facility. Now we see why. If Bear Stearns can borrow at 50 bps over the 28-day OIS rate, or anything in that ballpark, it would be scandal.

Finally, there is the crucial question of the nature of the collateral the Fed accepts (indirectly, through JP Morgan) for its loan to Bear Stearns, the valuation of this collateral and the haircut applied to it. If the Fed is accepting RMBS as collateral, it should insist on the highest grade RMBS on the balance sheet of Bear Stearns. The Fed is effectively buying the securities offered as collateral by Bear Stearns outright, because without the Fed’s intervention, the probability of default by Bear Stearns would be effectively 100%.

The Fed should also value the mortgage-backed securities and other illiquid assets offered as collateral punitively, certainly at no more than 60% of face value. With a further 25% standard liquidity haircut on the valuation, the Fed might just be sufficiently over-collateralised not to guarantee the tax payer a capital loss on the venture.


I am left with a list of questions:

  1. Why hasn’t the Fed declared “unusual and exigent circumstances” yet, so non-deposit-taking financial and other institutions in need of liquidity (like Bear Stearns) and blessed with eligible collateral can go directly to the discount window?
  2. Why was Bear Stearns offered the Fed lifeline rather than being left to sink or swim on its own? What were the systemic stability concerns that prompted this intervention to assist a non-deposit-taking institution?
  3. If Bear Stearns was deemed too systemically important to fail, why was it not taken into public ownership, preferably at a zero price?
  4. What are the securities the Fed is, directly or indirectly, accepting as collateral from Bear Stearns?
  5. What is the interest rate charged on the loan?
  6. How are these securities valued?
  7. What is the haircut applied to this valuation?

34 Responses to “Rescuing the Bear: why and why this way?”


  1. Thanks for pointing out the transfer of wealth from US taxpayers to Bear Sterns stockholders.

    Posted by: Anjul S | March 14th, 2008 at 9:18 pm | Report this comment

  2. This is scandalous. One question: if the government is worried about contagion, wouldn’t it make sense instead of bailing out the company, to instead provide whatever benefit it would have given that company to its competitors instead? Wouldn’t that avoid the moral hazard problem while providing the same level of support for the industry? Or are there systemic risks to an institution failing that I’m not taking into account?

    Posted by: Nick N. | March 14th, 2008 at 10:08 pm | Report this comment

  3. Why provide any support? It is a free market system for which those that can not play with intelligence should be penalized. The Fed has already allowed others to collapse. Where was Bernanke to bail out Thornburg, 21ST Century, or even the up and coming collapse of E-Trade.

    What was the Fed’s biggest fear, Inflation, what is happening now, Inflation. The Fed could not have handled the deteriorating market any worse by waiting so long to lower rates it has longer made a difference. Now they are propping up select organizations as they fail.

    I realize we do not want a total banking collapse, and suggesting no intervention is a bit extreme, but how difficult is it too look at a lending institutions finances? Any one of moderate intelligence can see that financial institutions are losing 10% of their asset base per quarter in the deteriorating value of the mortgages they hold above and beyond their retained earnings or equity. CFC, ETFC, and C are all in trouble.

    Posted by: Brent H. | March 14th, 2008 at 10:53 pm | Report this comment

  4. […] Buiter meint, man hätte Bear Stearns auch ruhig sich selbst überlassen […]

    Posted by: » Blog Archive » Bear Stearns | March 14th, 2008 at 11:00 pm | Report this comment

  5. “Without depositors, it also cannot trigger a run on its deposits,”
    That’s exactly what happened.
    I suggest you read the SEC statement:

    Posted by: JCK | March 14th, 2008 at 11:37 pm | Report this comment

  6. Apparently, the answer to question one is that the Fed can’t get the five governors to vote. Two seats are vacant and one guy is traveling and unavailable.

    Posted by: Steve | March 14th, 2008 at 11:38 pm | Report this comment

  7. Hi Willem, I suggest a read of this article from June last year may explain some of the issues you have raised. 9 months ago it would have been dismissed as conspiracy theorist nonsense - the idea of the ‘Evil Twins’ JPMorgan and Goldman Sachs. However, the description of events that were to unfold (months before Wall Street was on to this) is uncanny in its accuracy. Maybe the guy is onto something?

    “Bear Stearns is GROUND ZERO for the bond market firestorm…the theory that JPMorgan will serve as the ‘waste basket’ to capture the brunt of the underwater credit derivatives.”

    Posted by: Neil | March 15th, 2008 at 12:06 am | Report this comment

  8. Thank you thank you thank you. The financial press, especially in the US, rarely questions the self-serving arguments of “free-market” defenders of the Bernanke Put.

    Posted by: Jürg Gassmann | March 15th, 2008 at 2:10 am | Report this comment

  9. I am glad to see that Professor Buiter admits that de facto one hundred percent insurance of deposits would have avoided the deposit run on Northern Rock. However, he has always argued as a free marketeer that “moral hazard” means that such guarantees should never be given. Has he changed his beliefs?

    Posted by: Ian | March 15th, 2008 at 2:23 am | Report this comment

  10. Mr. Buiter,

    As for point 2, it surprises me how you cannot see that Bear, Stearns is systemically important: if the Fed let it fail today, what do you think would be crossing the minds of every portfolio manager with funds in a non-deposit taking institutions such as Lehman Brothers, Goldman, Sachs, Merrill Lynch? I can tell you: whether the transfer orders and DVPs they had ALREADY placed would clear without any problems.
    You see, the mood in the market now is one of anxious anticipation of the worst possible, whatever it may be. There is no other way to reconcile a 4% CPI reading with a 1.4% a.a. 2 year Note.

    Posted by: Lineu Vargas | March 15th, 2008 at 2:42 am | Report this comment

  11. […] Buiter wrote an excellent comment about Fed/JP Morgan joint action and raised a number of important […]

    Posted by: » Blog Archive » Crisis of confidence and the sin of short-termism | March 15th, 2008 at 11:15 am | Report this comment

  12. Dear Bill

    If the Fed had not acted in the manner that it did there would have been a real risk to other financial institutions. The cost of insuring funds has already jumped for other financial institutions. Case in point Lehman Brothers.

    Since you’re ensconced in academe I suggest you cut the umblicial cord and work in the corporate finance area, really work not some dithering consultant for GS.

    Cheers guy

    Posted by: Valerie Richards | March 15th, 2008 at 4:44 pm | Report this comment

  13. In answer to point 2, a key concern may have been the potential contagion effect of a default on outstanding derivatives contracts. Baer’s balance sheet in relation to the size of the US economy likely understates its relative systemic importance as a counterparty in the derivatives market.

    Per published ISDA figures, the notional amount outstanding of credit derivatives alone was $45.5 trillion as of mid-2007, and this was growing at a 75% annual rate. Given the magnitude of these numbers, default by a broker-dealer (even if it is only the 5th largest in the US) could produce a chain of effects that could be highly destabilizing in current market conditions.

    More generally, the transformation of the financial system in recent years has increased the potential for systemic risk from failure of non-deposit-taking institutions.

    Posted by: Jan Hettich | March 15th, 2008 at 6:04 pm | Report this comment

  14. The Fed did absolutely the right thing by stepping into rescue Bear Sterns. The near failure of Bear Sterns was inevitable in today’s frenzied world, where every scrap of minor information and rumour is amplified and carried around the world in a matter of minutes. It is now very important that the FED and other central banks fulfil their role as the ‘lenders of last resort’ and do all that they can to instil confidence in the financial system. The self styled free market idealogues criticising the fed in this blogue could not be more wrong indeed.

    Posted by: venkat | March 15th, 2008 at 6:59 pm | Report this comment

  15. I think the last comment by Jan hits the nail on the head. Bear’s demise, if uncontrolled, will see a complete collapse in the concept of, and market for, single name credit default swaps. As we all know this market has grown to a collossal size and has never been tested by a systemic breakdown. Yet it has become a vital way of redistributing credit risk; effectively an insurance market. If Bear fails the effect on the credit markets could be akin to the failure of Lloyds just at the time a hurricane hits.

    Posted by: Quattro | March 15th, 2008 at 7:51 pm | Report this comment

  16. To Jan & Quattro. Derivatives are archtypical inside assets. When the value of a derivative collapses, whoever was long the derivative loses; whoever was short the derivative gains an equal amount. Why are the losers so much more systemically significant than the winners in these zero-sum re-valuation games? One obvious asymmetry is that nothing unusual happens when gains get extraordinarily large. When losses get too large, there is default and bankruptcy. While fully recognising this asymmetry I would politely request that the winners in the inside asset revaluation game be recognised and analysed, rather than being ignored as has typically been the case. Please read my blog on Inside vs. Observing that there is $45.5 trillion notional amount of CDS derivatives outstanding only tells you that, collectively, the financial is flipping a gigantic coin. When that coin lands, we don’t have a destruction of $45.5 trillion of productive assets. We don’t even have the destruction of 25 cents worth of productive assets. There will just be a massive redistribution of wealth.

    Clearly, such as massive redistribution of wealth is likely to be disruptive, but it is rather different from ‘the army corps of engineers’ version of wealth destruction, which involves blowing up real capital and destroying real productive resources.

    The contraction of the CDS market we are witnessing is part of the general de-leveraging that is taking place, which will ultimately give us a financial sector that engages again in productive intermediation, rather than in trading risks that were often created by its own pointless creation of esoteric financial instruments, and would not have existed without it.

    Posted by: Willem Buiter | March 15th, 2008 at 8:26 pm | Report this comment

  17. I prefer that we are protected from this disaster. Fire the bastards that run the company and give it to the shareholders.

    Posted by: Robert DiAlberto | March 15th, 2008 at 8:49 pm | Report this comment

  18. hi Willem

    I certainly take your point on the symmetrical nature of these instruments. However, I would also argue that the “massive redistribution of wealth” to which you refer would be a very big logjam in the system for future credit creation. I don’t want to crash my car and discover my insurance policy is null and void. Indeed the “winners” in a situation where CDS failures occur may find it rather hard to persuade the “losers” to pay up. With that said I promise I will go and read the blog to which you refer!

    Posted by: Quattro | March 15th, 2008 at 8:57 pm | Report this comment

  19. […] Rescuing the Bear Rescuing the Bear: why and why this way? […]

    Posted by: Rescuing the Bear « Phil’s Back-Up Website | March 15th, 2008 at 8:59 pm | Report this comment

  20. @Ian

    I think you are wrong suggesting that 100% deposit insurance for banks is a good thing. In that case the “moral hazard” argument is even stronger, since the bank managers would actually take larger risks knowing that all deposits would be repaid by the government. Someone could just start a bank and take the money and gamble in the casino, and if it failed the government would have to pay the bill. The lack of 100% deposit guarantee also makes the public more likely to make well-informed decisions, i.e. save and invest in well established banking institutions. Plus, its easier to justify repaying 100k to an individual when this all the money they have, rather than repaying someone 100 million because he thought that couple of bp’s yield higher was a good deal.
    What i think is needed in the UK is a system that allows the government to take outright control of deposits and move them to another bank.

    Given the nature of the banking business, one needs to be very careful about issues of confidence due to the self-fulfilling and systemic elements of a bank faillure for the entire financial system. It is therefore not surprising that the Fed chose this course of action, especially if we take into account that we are in the midst of perhaps a serious financial crisis. In that sense, anyone is entitled to voice their opinion, however policymakers ought to make decisions based on facts and expert knowledge and only after careful consideration of all the likely options and potential outcomes.

    Posted by: Achilleas | March 15th, 2008 at 9:28 pm | Report this comment


    Posted by: Achilleas | March 15th, 2008 at 10:01 pm | Report this comment

  22. Bravo Professor!

    Thanks much for so elaborately pointing out that
    this bail out is really just corporate welfare. The USA is a country that robs from the middle class and gives to the rich. Bear Stearns is a classic example. The halls of the Federal Reserve are filled with Wall Street cronies. You don’t become a Fed governor without rising through the financial institutions. Thus, the Fed is nothing more than a lobby by and for Wall Street. It’s like putting the Beef lobby in charge of the Department of Agriculture, the Forestry lobby in charge of the Department of the Interior, the Insurance lobby in charge of Health and Human Services, etc. The level of corruption is appalling.

    Posted by: joe smith | March 15th, 2008 at 10:04 pm | Report this comment

  23. Why aren’t the people who got huge bonuses only a couple of months ago propping up their now failed companies?
    They got their money out of the Bear, and the rest of us are left holding the bag!

    Posted by: babaloo | March 15th, 2008 at 10:04 pm | Report this comment

  24. They’re levered at 30 to one. If they go down, they dump it all on the market. The Fed doesn’t want that to happen.

    If the argument is “this bank is too big to fail” and it is - given all the securities they’d “fire sale.”

    Then my response is: don’t let these guys get that big in the first place… Greenspan (Reagan’s “brilliant” Fed chief) Bush, Cheney, Paulson et al.

    Posted by: VennData | March 15th, 2008 at 11:42 pm | Report this comment

  25. Could the concept of an “Auffanggesellschaft” be a fair and orderly solution (especially for the employees and shareholders) to the situation at Bear Stearns? This type of rescue company is common in Germany, Austria and Switzerland. Professor Buiter and bankers who read this blog may well think so?

    Posted by: fh | March 16th, 2008 at 11:13 am | Report this comment

  26. Citizens of the U.S. You are being Bernanked. When this is over, looking back from the year 2010, you will know what this term means. Until then, anything and everything is possible and probable. It will be a financial environment beyond your wildest imaginations.

    Mr. Buiter’s questions deserve to be clearly answered in writing by the Chairman of the Fed and circulated to all taxpaying residents.

    Posted by: Boat 52 | March 16th, 2008 at 2:47 pm | Report this comment

  27. Are there not grounds here for a lawsuit in u.s. federal court to enjoin the Fed from going ahead with this loan, on the ground that it is a “sham transaction” — in other words, in substance but not form, it is simply a loan to Bear Stearns, with the obvious intention of avoiding the restriction that such a loan may not be made to a non-depository institution (absent the declaration of exigent circumstances Mr. Buiter describes). This is a principle often invoked by the United States Internal Revenue Service, for example, to avoid fraudulent tax shelter transactions.

    Posted by: robert a | March 16th, 2008 at 4:18 pm | Report this comment

  28. It seems everyone is focusing on the effect and ignoring the cause. Our Congress, at one time, very much encouraged the lending that took place. Our Pres. often boasted that home ownership was at all time highs. Alan, bless his heart, left rates at 1% far too long. There is no denial that the banks and shysters took advantage and used poor judgement. However, our Congress handed the candy basket to the kids and encouraged them to eat all they could. Kids will be kids.

    Posted by: Bernoulli | March 16th, 2008 at 5:56 pm | Report this comment

  29. […] salvar a pele do urso (i.e. do Bear Stearns). É a opinião, por exemplo, de Nouriel Roubini e de Willem Buiter. Gretchen Morgenson, do New York Times, explicou direitinho as possíveis conseqüências negativas […]

    Posted by: Edição especial de domingo « Notícias do mercado | March 16th, 2008 at 9:44 pm | Report this comment

  30. @robert a - and further to an earlier post of mine (above, March 14th, 11.51pm)

    Section 13(3) of the Federal Reserve Act (which contains the basic precondition of a determination of unusual and exigent circumstances) should be read in conjunction with section 11(r)(2)(A) of the same Act which provides that:

    “[a]ny action that the Board is otherwise authorized to take under section 13(3) may be taken upon the unanimous vote of all available members then in office, if—
    (i) at least 2 members are available and all available members participate in the action;
    (ii) the available members unanimously determine that—
    (I) unusual and exigent circumstances exist and the borrower is unable to secure adequate credit accommodations from other sources;
    (II) action on the matter is necessary to prevent, correct, or mitigate serious harm to the economy or the stability of the financial system of the United States;
    (III) despite the use of all means available (including all available telephonic, telegraphic, and other electronic means), the other members of the Board have not been able to be contacted on the matter; and
    (IV) action on the matter is required before the number of Board members otherwise required to vote on the matter can be contacted through any available means (including all available telephonic, telegraphic, and other electronic means); and
    (iii) any credit extended by a Federal reserve bank pursuant to such action is payable upon demand of the Board.” (italics added).

    According to the Wall Street Journal, Fed officials have indicated that four “available” Fed governors did in fact determine unanimously that there existed “unusual and exigent circumstances” – and that the fifth governor was abroad and unavailable. CNBC has reported that the latter claim – and the legality of the loan to Bear – has been contested by the Inner City Press Community on the Move, a “housing and fair lending activist group” in a complaint filed with the Fed on Saturday.

    Posted by: cahagnes | March 16th, 2008 at 10:17 pm | Report this comment

  31. Are you sure you aren’t related to Hoover? It’s nice to know that you are short the market to an obvious degree.

    Posted by: Matt Markell | March 16th, 2008 at 10:37 pm | Report this comment

  32. The Man and the Monkeys: A Wall Street Fable

    Once upon a time in a village a man appeared and announced to the villagers that he would buy monkeys for $10 each.

    The villagers knew that there were many monkeys in their forest. They left their farms on the plains and went into the forest to catch them. The man bought thousands at $10.

    As the supply of monkeys started to diminish the villagers stopped looking. Finding and catching monkeys was soon no longer worth the effort for $10. They started to return to their farms to plant the spring crop.

    The man then announced that he would buy monkeys for $20 each. This new higher price renewed the effort of the villagers and they headed back into the forest to find and catch monkeys again to sell.

    When the monkey supply diminished even further that summer and the people started to return to their farms, worried they had not made enough money selling monkeys to buy all the food they needed but had not planted any crops yet either, the man raised the price he’d pay for monkeys to $25 each. The hunt was on again.

    Soon the supply of monkeys became so small that a villager didn’t see a monkey in a day of hunting let alone catch one. Even at $25 each the effort was not profitable so the villagers finally headed back to their farms that fall. After nine month’s absence from their farms they knew the time had passed to produce enough food for the coming winter, but at least now they had enough money from selling monkeys to buy food to eat.

    But the man wasn’t finished. He announced that he would buy monkeys for $50 each! The villagers became very excited. He also explained that he had to go to the city on business and that his assistant was to stay behind to buy monkeys on his behalf.

    As soon as the man left the assistant told the villagers, “So you think you have made a lot of money selling monkeys, don’t you? But do you want to really get rich?”

    “Yes, yes!” said the villagers.

    The man’s assistant went on. “I have a gigantic, enormous cage filled with monkeys. I will sell them to you for only $35 each and when the man returns from the city you can sell them to him for $50 each and make a fat profit. You don’t even have to work to find monkeys at all. Then you can not only buy all the food you need for this winter you call all buy flat panel TVs, too.”

    The villagers were thrilled. They collected all of their savings together and bought all the monkeys in the assistant’s cage then awaited the man’s return.

    They never saw the man nor his assistant again. All the monkeys that were once in the woods were now in the village. All of the villager’s savings were gone.

    Moral: Substitute housing for monkeys. As the winter of the US economy arrives, you still have the house you had before the price was bid up. Now that prices are falling back down, who has your savings?

    Now you know how Wall Street works an asset bubble racket.

    (Original by Anonymous, improvements by metalman.)