Richard Whalen

In the showdown on Wall Street March 17-21, Timothy Geithner, President of the New York Federal Reserve Bank dictated to Bear Stearns, the smallest major ($11 billion capital) investment bank that it would be sold to J P Morgan Chase, the fifth largest commercial bank, for a mere $2 a share, vs. $171 a share last year. Bear’s $30 billion of short-term derivative contracts, with a notional value of $10 trillion, would be guaranteed by the Fed.

Founded 85 years ago, Bear Stearns, originally a scrappy gang of money-making German-Jewish bond traders now reinforced by tough, bright Ivy leaguers, pocketed the New York Fed’s offer and kept on negotiating. By week’s end, the price of Bear’s stock had crossed $10 a share – and Morgan met it, raising its offer five-fold.

Actually, the Bear may have been in much less trouble than Morgan, which had some $46 trillion of notional value derivatives outstanding. Bear’s temporary cash-shortage – a classic run on the bank by rumor-driven clients – gave Geithner & Co. the opportunity to rescue Morgan, perhaps their real aim from the start.

A crucial conflict of interest: Morgan’s CEO, Jamie Dimon, sits on the New York Fed’s Board. Isn’t Wall Street a small place!

The New York Fed bank lent funds directly to the Bear – a major precedent – but one that could have happened without Morgan’s involvement. All the Washington Fed had to do was announce that the discount (loan) window was open to the Bear. In the panicky hours of confusion, the New York Fed facilitated the insultingly low-ball, two-buck offer for Bear and infuriated the employee-shareholders who owned one-third of the firm.

Now that Bear has survived with a Fed lifeline, many angry shareholders want to keep the feisty firm independent. Morgan’s takeover squad are on the Bear’s premises (the building alone is worth $1.2 billion), but the brokers could throw the bankers out.

As my son, Christopher Whalen, writes in his weekly newsletter, all Wall Street is horrified by the “rape of Bear Stearns” – he and I are both Bear alumni -- but we realize that expanded regulatory oversight is necessary. So is overdue Congressional oversight. We know this much:

• Bear Stearns is alive and independent, despite Morgan and the New York Fed conniving against them. A shareholders’ vote is needed to seal the deal.
• Plenty of capital is said to be available to the Bear from Europe and Asia.
• The needless tidal wave of liquidation and litigation unleashed by the New York Fed’s premature takeover of the Bear will prove costly and embarrassing to the Fed and American taxpayers.
• As insiders know, the “Crown Jewel” of the Bear, never mentioned in the New York Times and the Wall Street Journal accounts written from the sidewalk, is its superb “back office” clearing operation, which clears the daily trades of some 2,000 smaller firms across the country.

Nothing like this marvel of money-moving efficiency exists anywhere else on Wall Street. And Morgan wants it. I think Bear Stearns will rise again!