Fed rescue of Bear Stearns raises specter of Depression-era crash
By Barry Grey
15 March 2008The Federal Reserve Board on Friday took emergency action to prevent the collapse of Bear Stearns, the fifth largest US investment bank and one of the world’s largest finance and brokerage houses.
Invoking a little-used provision added to the Federal Reserve Act in 1932, at the height of the Great Depression, the US central bank agreed to allow the Federal Reserve Bank of New York to insure an infusion of credit to Bear Stearns by JP Morgan Chase. Under the terms of the “secured loan facility,” to extend for up to 28 days, the risk of a default by Bear Stearns will be borne by the Federal Reserve Bank of New York, not JP Morgan Chase. The latter will serve essentially as a conduit for the cash provided by the US central bank.
This mechanism was used because only commercial banks, so-called depository institutions, can borrow directly from the Fed’s discount window. Bear Stearns is not a depository bank, and hence the Fed was obliged to invoke a provision of the 1932 amendment to the Federal Reserve Act that applies when “unusual and exigent circumstances exist and the borrower is unable to secure adequate credit accommodations from other sources.”
The announcement of the Fed bailout sent shivers through Wall Street and shook financial markets around the world. It confirmed rumors that had been mounting over the past week that Bear Stearns, the second largest US underwriter of mortgage bonds, did not have the cash to meet claims by its creditors. The rescue operation came one day after the collapse of Carlyle Capital Corporation, a $22 billion publicly traded investment fund controlled by the Carlyle Group, long one of the most profitable and well-connected private equity firms in the US.
http://www.wsws.org/articles/2008/mar2008/bear-m15.shtml