Fed rips off taxpayers to benefit JPMorgan Chase and Bear Stearns creditors

The Federal Reserve should have been closely monitoring Bear Stearns and forced it into restructuring as Bear Stearn’s net equity (assets less liabilities) approached zero.

Instead, the Fed let Bear Stearns continue operating until it had racked up massive debt.

At this point, the Fed should have said to Bear Stearns' creditors, “Well, Bear Stearns has negative equity, so it can’t pay you in full but will give you XX cents on the dollar.”

Instead — the Fed finally revealed right before this three-day holiday, during which Congress is on recess — the Fed stripped out Bear Stearns' worst investments, including “liar loans,” and paid Bear Stearns tens of billions of dollars more for them than they were then worth!

After effectively injecting tens of billions of dollars into Bear Stearns, the Fed then let JP Morgan Chase buy — practically for free — Bear Stearns stripped of its crippling debt, creating an even-bigger-than-too-big-to-fail bank.

How bad was the garbage the Fed overpaid for?

“To say this portfolio is a pile of junk is being unkind to junk,” David Zervos, Jefferies & Co. global fixed-income strategist, wrote in a note Thursday.

(As outrageous as this story is, I’m even more outraged by how hard it is to find articles about it.)

Posted by James on Friday, April 02, 2010