Academic

Monitoring Wall Street ... Up Close and Personal

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

When I speak with my Law & Entrepreneurship students about monitoring in the venture capital context, I always make a point of observing that continuous monitoring of portfolio companies by venture capitalists is not cost effective. That's one reason venture capitalists invest in stages. Each round of investment provides an opportunity for intermittent monitoring.

Makes sense, right? Now consider this from today's W$J:

For the first time in more than a decade, the Federal Reserve has set up shop inside brokerages to monitor their financial condition, perhaps the beginning of an expanded role for the central bank and additional regulation for Wall Street.

This revelation comes on the heels of Ben Bernanke's visit to Congress, where he discussed the Bear Stearns transaction:

The Fed last month threw Bear Stearns a $30 billion lifeline to pave the way for its rapid sale to J.P. Morgan Chase & Co. and to prevent a destructive ripple effect on Wall Street....

The Fed has offered little detail about the collateral backing the loan. J.P. Morgan is responsible for the first $1 billion in losses from a pool of $30 billion in assets. The Treasury Department recently told the Senate Finance Committee that the collateral consists primarily of mortgage-backed securities and related hedge-fund investments but has offered no other details.

Mr. Bernanke said the collateral consists entirely of investment-grade assets that are "entirely current and performing." He added that the Fed's investment adviser, money manager BlackRock Inc., is "reasonably confident that we would be able to recover the full amount" if the assets are sold on a "measured" basis rather than at once. Later, he also expressed confidence "that we'll be able to recover all the principal and indeed some interest, and there's some chance of even upside beyond that."

Did you know the Fed had an investment advisor? And that Bernanke was hoping to make money off the Bear Stearns investment?! The Fed is looking like a venture capitalist. A very hands-on venture capitalist.

Full post as published by Conglomerate on April 03, 2008 (boomark / email).