Maybe the Fed is just stupid

“But as strange as that is, a stunning revelation came from a very senior Japanese executive, who sent these notes from a meeting with a top Japanese financial official:

The depth of the problems at Bear Stearns which led up to the buyout are not clear. Mr. X wondered why they did not try to use committed credit lines before agreeing to the JPM Chase deal. These lines were significant and included large amounts committed by Japanese banks, who are now relieved that they did not have to extend the credit.

“Maybe Bear assumed at the rate of its cash depletion that it would burn through those credit lines quickly and being more leveraged might make other solutions more difficult, but the tone of the Japanese notes is that the credit lines were large enough in aggregate to have made a difference.

“And even odder: those credit lines are still in place. Why did the Fed stump up a whole $30 billion? This seems a tremendous oversight on its behalf. Of course, those lines probably terminate upon a change in control, but the Fed probably could have leaned on the banks to keep them in place (after all, they are lending against a better balance sheet with JPM, although adding the Bear lines to whatever credit facilities they now have with JPM might put them over their limits for exposure to any one bank. But the Fed could have offered to backstop the excess, which would be a smaller commitment than the one it made).

“Stranger and stranger….”
Why didn’t Bear use its credit lines?, Naked Capitalism, March 21, 2008

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