Bear bailout illegal?
That's the contention of John Hussman, manager of a leading long-short mutual fund (and a favorite of Strategic Short Report editor Dan Amoss). In his weekly note to shareholders, Hussman says the trouble lies with the Federal Reserve's willingness to take on $30 billion of Bear's most worthless paper.
In my view, the deal would be palatable if J.P.
Morgan was to remain fully responsible for any losses on the
“collateral” provided to the Federal Reserve, assuming shareholders
were to consent to the buyout. As it stands, Congress should quickly
step in to bust the existing deal and demand an alternate resolution,
by clearly insisting that the Fed's action was not legal.
Fed did not act to save a bank, but to enrich one. Congress has the
power to appropriate resources for such a deal by the representative
will of the people – the Fed does not, even under Depression era
banking laws. The “loan” falls outside of Section 13-3 of the Federal
Reserve Act, because it is not in fact a loan to either Bear Stearns or
J.P. Morgan. Bear Stearns is no longer a business entity under this
agreement. And if the fiction that this is a “loan” to J.P. Morgan was
true, J.P. Morgan would be obligated to pay it back, period. The only
point at which the value of the “collateral” would become an issue
would be in the event that J.P. Morgan itself was to fail. No, this is not a loan. It is a put option granted by the Fed to J.P. Morgan on a basket of toxic securities. And it is not legal.
I'm not holding my breath for Congress to assert its Constitutional powers on this one — not when it's rolled over time and again in the face of unconstitutional power grabs by a White House acting on loony-tunes "unitary executive" theory. And as it turns out, J.P. Morgan's revised offer of $10 a share may well squelch whatever Congressional concerns might exist. Hussman wrote his letter before that revised offer came out, questioning why Bear stock was trading for $6 when J.P. Morgan's original offer was for $2.
Bear's stock is selling at more than $2 for two reasons – one is that
the market evidently believes there is some chance for the deal to be
busted, either by Congress or by shareholder rejection. And second,
because Bear's bondholders are frantic to own the stock so they can vote for this lousy deal to go through.
Under the revised terms, J.P. Morgan will now be on the hook for the first $1 billion in losses from that nigh-worthless $30 billion tranche. But beyond that, it's still the Fed's baby.
The issue of the deal's legality remains. But $10 a share will probably be enough to assuage everyone's concerns, and the law be damned.