More Taxpayer Dollars May Be Put At Risk Before Financial Crisis Blows Over
Federal Reserve officials and executives for JPMorgan and Bear Stearns were called in for testimony today before the Senate Banking Committee. Lawmakers called for the hearings because of the controversy surrounding the fire sale buyout of Bear Stearns and the use of taxpayer dollars to finance the acquisition.
A run on the investment bank crippled the cash position of the firm, leaving it unable to meet it’s margin calls. Fed officials vigorously defended their actions, stating that their intervention prevented further damage to an already weak financial system.
The initial $2 a share buyout offer was geared towards lessening the risk exposure to taxpayer dollars although it was raised to $10 a share a week later. It doesn’t appear as if lawmakers will attempt to block the deal, accepting the Fed’s testimony on the economic consequences if they hadn’t taken action.
The Fed is reaching their lower limit on how much they can continue to cut interest rates. Many investors are expecting another half a percentage point cut but after that who knows. The dollar is being hammered on currency markets causing an upward pressure on the prices of dollar denominated assets like crude oil.
The Fed has also had to open up it’s discount window to investment banks something it hasn’t done since the Great Depression. Bear Stearns CEO, Alan Schwartz remarked that his company may has survived if the Fed had instituted that policy sooner.
If this situation has proven anything, it’s that some institutions are vital to the financial system and are too big to let fail. With the current financial crisis far from over, the Fed may be called again to use taxpayer dollars to prevent the further deterioration of the nation’s banking system.
