Fed’s action in Bear Stearns's near collapse could signal new phase in credit crunch

The Federal Reserve agreeing to sell Bear Stearns Cos. to JPMorgan Chase & Co. for about $250 million and to fund $30 billion of Bear Stearns's assets that would be difficult to sell quickly, signals an unnerving new phase into the protracted credit crunch, according to a Los Angeles Times editorial.

“No longer is the Fed simply pumping money into the economy to promote lending. It is now putting taxpayers on the hook for investments of uncertain value and extending federal help to Wall Street firms whose activities haven’t been regulated as closely as commercial banks,” the editorial said, calling the Fed’s actions extraordinary.

The storied Bear Stearns, once the country’s fifth-largest investment bank, was in trouble because its investors no longer believed it could repay its loans, even loans for short terms including overnight, reported USA Today. Investors concluded the bank was no longer able to stand behind the complex agreements it had with other banks, investment houses, and corporations.

“As far as Wall Street securities houses go, Bear Stearns wasn’t too big to fail,” Steve East, chief economist for FBR Capital Markets, told USA Today. “It was too interconnected to fail.”

The housing bubble was the catalyst for Bear Stearns’ problems as banks loaned money to people who normally wouldn’t qualify for conventional mortgages. Wall Street bought these subprime mortgage loans and mixed them with other types of debt and created complex investments, which were sold to investors. That process worked until the economy worsened and people who had borrowed money began to default on payments. Bear Stearns has been described as one of the biggest underwriters of complex investments tied to mortgages. Deloitte & Touche warned investors that more than 60 percent of the net worth of two Bear Stearns’ hedge funds was tied up in exotic securities, according to Businessweek. The Deloitte & Touche 2006 audit was released in May 2007.

“The hedge funds were built so they were virtually guaranteed to implode if market conditions turned south,” according to a Businessweek analysis of confidential financial statements for both funds and interviews with forensic accounting experts, traders, and analysts.

The Los Angeles Times said the innovations that helped extend credit to more borrowers are now showing “a flip side that asleep-at-the-switch regulators and policymakers didn’t anticipate.”

You may like these other stories...

Here's a CPA who truly walks the walk. On March 15, Frank Ryan, CPA, departed San Diego, California, with plans to be in Ocean City, Maryland, by July 2 to teach a course at the Maryland Association of CPAs’ (MACPA...
When Theodore J. Flynn first joined the Massachusetts Society of CPAs (MSCPA) in 1970, it was a different world and a different profession.  The "Big Eight" were still headquartered in Boston. Vietnam War...
Accountant Rickey Charles Goodrich had it a little too good. Many bean counters would kill to serve as financial guru to the likes of Pearl Jam. Goodrich was hired in 2005, and the following year, he became the CFO of Curtis...

Upcoming CPE Webinars

Apr 17
In this exciting presentation Excel expert David H. Ringstrom, CPA shares tricks that you can use with pivot tables every day. Remember, either you work Excel, or it works you!
Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.