Bankruptcy

Wall Street Bail-Outs Will Cost Taxpayers

By J. Michael McBride

There is an interesting article out today which attempts to make sense of the current Wall Street bail-out and its impact on taxpayers. Perhaps it is no surprise that shifting the losses in the Bear Stearns portfolio over to the Federal Reserve does not mean that those losses disappear. Instead, it means that the Fed itself and ultimately the US taxpayer will suffer the cost of those losses. This is but one example since the recent changes in how Freddie Mac and Fannie Mae operate will also likely result in losses to the taxpayer. One of the most important ways in which all of the taxpayers are funding this series of bail outs is by the diminishing value of the dollar, but that topic is not covered in this particular article. Here are some quotes from the article:

“History suggests the Fed may not recover some of the almost $30 billion investment in illiquid mortgage securities it received from Bear Stearns Cos., said Joe Mason, a Drexel University professor who has written on banking crises. Treasury's push to have Fannie Mae and Freddie Mac buy more mortgage bonds reduces the capital the government-chartered companies hold in reserve at a time when foreclosures and defaults are surging.

Regulators ``are playing with fire,'' said Allan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh. ``With good luck, none of these liabilities will come due. We can't expect that good luck, and we haven't had it.''

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson were forced to respond after capital markets seized up and Bear Stearns faced a run by creditors. In an emergency action that jeopardizes the dividend it pays the Treasury, the Fed authorized a $29 billion loan against illiquid mortgage- and asset-backed securities from Bear Stearns that will be held in a Delaware corporation. JPMorgan Chase & Co. contributed $1 billion.”

Here is a link to this interesting article from Bloomberg: http://www.bloomberg.com/apps/news?pid=20601109&sid=a4ZyPj4AHfmU&refer=exclusive

Michael

Full post as published by Texas Lawyer Blog on March 26, 2008 (boomark / email).