Phil’s Favorites

Rescuing the Bear: why and why this way?

Here’s an excerpt from a blog article posted at Ft.times by Willem H. Buiter:

“With a little help from its friends, especially JP Morgan, Bear Stearns, one of the 20 Primary Dealers (in US government securities) and one of 30-odd prime brokers, is now borrowing at the Fed’s primary discount window. Bear Stearns cannot do so itself, because it is not a deposit-taking institution entitled to access the Fed’s discount window. JP Morgan has access to the Fed’s discount window, so Bear Stearns is, indirectly through the good (and no doubt adequately remunerated) offices of JP Morgan, engaged in collateralised borrowing from the Fed. The loan from the Fed to JP Morgan is non-recourse and the JP Morgan to Bearn Sterns leg is part of a back-to-back arrangement, that is, it is a loan from the Fed to Bearn Stearns via a bank, JP Morgan. The non-recourse bit means that if Bear Stearns defaults on its loan to JP Morgan, JP Morgan does not have to repay its loan to the Fed. It is, effectively, a collateralised loan on discount window terms, from the Fed to Bear Stearns…” Click here for entire article.