You can’t pin down Jeremy Stein. To begin with, he’s not for or against anything. Also, he’s had gymnastics rings installed above the Fed’s conference tables, and which of his colleagues is going to go up there and get him? Read more »
We earlier reported that officials at the Federal Reserve and Treasury are scrambling to find a buyer for Lehman Brothers, perhaps going as far as bending or waiving rules that limit the ability of private equity firms to buy sizable stakes in investment banks. Part of the rationale for this may be because the Fed and Treasury want to avoid putting its own balance sheet or taxpayer funds into what would widely be perceived as another bailout.
There seems to be an increasing consensus among commentators that Lehman won’t be bailed out by the Federal Reserve or the Treasury. Over at RealTimeEconomics, Sudeep Reddy adds color to this idea by pointing out that to Fed officials it may well appear that they have already bailed out Lehman. The primary deal credit facility gives Lehman Brothers access to the discount window, allowing it to borrow cheaply against collateral arguably priced at inflated values. Indeed, Bill Gross of Pimco has publicly cited the facility as preventing him from withdrawing from trades with Lehman on the other side.
What’s more, the Treasury and the Fed may want to reduce the moral hazard issue in the market by allowing an institution to fail, Reddy says. But its not clear that they will have the luxury of adding discipline to the market. Lehman is deeply intertwined in the credit markets, particularly, and its failure could have unwanted ripple effects, rocking the stability of the broader financial markets. A better solution, some at the Fed believe, would be to find a willing buyer and arrange private financing without a Fed backstop. This most likely explains the Fed scramble to find a buyer.
Would the Fed Let Lehman Fail? [Wall Street Journal]
Shares of Freddie Mac and Fannie Mae have continued to drop this afternoon. Their credit-default swaps are up sharply, and there is lots of talk that they might need to raise more capital. Both plunged to their lowest price in 13 years.
There are a number of contributing factors this morning. Lehman Brotherss analysts pointed to an accounting change may force them to raise a combined $75 billion of new capital. Traders are talking about further write-downs. This morning’s “Heard on The Street” column added fuel to the fire, focusing attention at the challenges faced by Freddie.
Unconfirmed, unsubstantiated and possibly baseless rumors began circulating late this afternoon that the Federal Reserve may step in to bailout the government sponsored home lending giants. Both firms definitely fit the bill of being too big and too connected to be allowed to fail, and today’s losses may be truly frightening to regulators and Fed economists. The biggest problem with this rumor, however, is that it would involve very quick action by the Fed, something many doubt the backward looking economist types at the Fed are capable of.
Freddie Mac, Fannie Mae Plunge on Capital Concerns [Bloomberg]
Late Thursday afternoon, long after the markets had closed and many on Wall Street had long since evacuated for the long weekend, the Federal Reserve revealed its estimates for the value the Bear Stearns assets it accepted as collateral for the $28.9 billion loan JP Morgan Chase used to buy the firm and prevent its bankruptcy. That collateral was worth just $28.8 billion, according to the Fed.
What this means is that the decline in the collateral value has already eaten through a good chunk of the $1.15 billion of exposure JP Morgan agreed to take as part of the deal. The collateral has already declined by 3.7% in a couple of months. Much of the collateral consists of mortgage linked securities, so unless that market turns around sharply, it seems likely that taxpayers will be forced to foot the bill for Bear Stearns collapse.
Indeed, The New York Post reported this morning that a hedge fund investor in JP Morgan is predicting further declines in the collateral values. Taxpayers are on the hook for any decline past the $1.5 billion hit JP Morgan agreed to take. The Fed is being criticized for not revealing more about the assets that make up the collateral. JP Morgan says it is bound by a confidentiality agreement not to comment.
Hedge Fund Report: Bear Buyout Could Cost Taxpayers [New York Post]
Corporate loan agreements are being drafted to include an express provision allowing lenders to transfer their loans to the Federal Reserve, a loan expert tells DealBreaker. The Fed has been accepting a much broader range of collateral in exchange for short-term loans through what is known as Fed “repos.” In a repo, dealers bid on borrowing money versus various types of general collateral.
The new provisions seem to anticipate the possibility that banks might use corporate loans in repos, accessing cash from the Fed in exchange for the credits. In the past the assignment provisions of loan agreements that governed transfers typically did not expressly permit transfer to the Fed. Instead, they permitted assignment to others commercial banks, insurance companies, investment or mutual funds or other entity that is an “accredited investor” under securities laws. The new provision illustrates the ever more pervasive role the Fed has in the current credit markets.