U.S. Senate Probes Bear Stearns Deal
Wednesday, March 26, 2008
Bear Stearns shareholders aren't the only ones questioning the bargain-basement buyout of the investment bank. Top lawmakers want additional information about the government's role in pushing the sale of Bear Stearns Cos. to JPMorgan Chase & Co. The deal, negotiated earlier this month, was altered on March 24, 2008, when JPMorgan increased its offer for Bear Stearns to $10 per share from $2 a share, aiming to appease Bear Stearns shareholders angry about the sale price.On March 26, 2008, Senators Max Baucus, D-Mont., and Charles Grassley, R-Iowa, the chairman and senior Republican on the Senate Finance Committee, sent a letter to executives at Bear Stearns, JPMorgan, the Federal Reserve and Treasury Secretary Henry Paulson asking for a detailed set of documents by March 28, 2008.
The Federal Reserve is providing $29 billion in backing for that deal, raising concerns that the Fed, and ultimately U.S. taxpayers, could wind up on the hook. Supporters of the Fed's role say it was needed to prevent a panic from spreading on Wall Street that could have derailed the overall economy, but some lawmakers are skeptical.
"Americans are being asked to back a brand-new kind of transaction, to the tune of tens of billions of dollars," Baucus said in a statement, adding that lawmakers want to "pin down just how the government decided to front $30 billion in taxpayer dollars for the Bear Stearns deal."
Grassley said lawmakers want to examine "whether the taxpayers will lose money here, what kind of precedent this sets for federal involvement when other firms overextend themselves." He added that the deal raises questions about "whether top executives will come out better than the rank-and-file workers who weren't in the room negotiating."
The new agreement calls for the Fed to assume control of $30 billion of Bear Stearns' assets, which will be managed by New York-based investment firm BlackRock Inc. If there are losses on those assets, JPMorgan will take responsibility for the first $1 billion, with the Fed absorbing the rest.
If the Fed does lose money, the central bank's payments to the government could be reduced. The 12 Federal Reserve banks paid $34.4 billion of their $41.9 billion in total income to the Treasury last year, the majority of which was earned through income on government-backed securities.
Representatives of Bear Stearns and JPMorgan couldn't immediately be reached for comment. Spokeswomen for the Treasury Department and the Fed said they would respond to the senators' request.
Rep. Henry Waxman, D-Calif., who heads the House Oversight and Government Reform Committee, is also collecting information for an inquiry, a committee aide said last week.
In addition to the Bear Stearns rescue, the Fed, in the broadest use of its lending authority since the 1930s, is letting squeezed Wall Street investment houses go directly to the central bank for emergency loans. That had been a privilege reserved for commercial banks.
The corrosion of Bear Stearns has prompted calls for tighter controls over investment banks including stricter cushions against losses. Paulson said that the breakdown of Bear Stearns underscores a need to bring investment banks under the same kind of federal oversight commercial banks receive. The Bush administration aims to soon release its own blueprint for regulatory overhaul.
"This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions," Paulson said in a speech to the U.S. Chamber of Commerce.
Rep. Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, last week unveiled a proposal to give the Fed or a new regulator the power to supervise the operations of major financial players. Critics see the current regulatory system as ineffective and unwieldy patchwork.
The Fed, divisions of the Treasury Department and the Securities and Exchange Commission each have jurisdiction over different types of financial institutions.