Courtesy of Pam Martens
On April 3, 2008 Federal Reserve Chairman Ben Bernanke and the President of the Federal Reserve Bank of New York, Tim Geithner, appeared on a panel of witnesses before the U.S. Senate Banking Committee. The subject of the hearing was the Federal Reserve’s unprecedented actions the prior month to bail out the collapsing investment bank, Bear Stearns, and facilitate its purchase by JPMorgan Chase.
Putting Bear Stearns into the hands of JPMorgan Chase, now a three-count felon, was like returning a garden snake to a pet store and walking out with a python.
The New York Fed had crafted a deal where $30 billion of toxic assets were going to be purchased from Bear Stearns to prevent JPMorgan from bearing the risk of sizeable losses when it took over the firm. The New York Fed put up $28.82 billion in a loan to a newly crafted entity called Maiden Lane LLC to buy the bulk of the $30 billion in toxic assets while JPMorgan Chase put up a miserly $1.15 billion. Bear Stearns’ shareholders got a purchase price elevated from $2 a share to $10 a share.
While the deal was waiting to close, the Fed would pump another $853 billion into Bear Stearns in secret, below-market loans that were not disclosed until years later.
In an amazing moment of prescience, the late Senator Jim Bunning asked during the Senate Banking Committee hearing: “What’s gonna happen if a Merrill or a Lehman or someone like that is next?” (Merrill collapsed into the arms of Bank of America just 5 months later and Lehman Brothers filed for bankruptcy protection on September 15 of that year.) Both Bernanke and Geithner danced around that issue.
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