What does big bank buyout really mean?
To some extent it depends, but recent action by Fed on Bear Stearns is a clear, serious warning signal about economy
By Carrie Mason-Draffen
Newsday
Tuesday, March 18, 2008 11:42 AM PDT
| |
| Steven Granger, Labranche & Co. LLC, directs trading on the floor of the New York Stock Exchange, Monday. Wall Street clawed back from sharp losses as investors snapped up bargain stocks following J.P. Morgan Chase & Co.’s government-backed buyout of the stricken investment bank Bear Stearns Co. |
NEW YORK — In financial moves some experts said are reminiscent of the Great Depression, the Federal Reserve has engineered the sale of the ailing investment firm Bear Stearns to J.P. Morgan Chase & Co. for nearly $270 million.
As part of that deal, the Fed is extending Chase a $30 billion federally guaranteed line of credit.
That move is the latest of many the Fed has taken to calm jittery credit markets, where money is raised for a host of things, including credit cards, auto loans and mortgages.
The Fed’s other moves include making more money available to banks and brokerage firms, or making them more liquid.
“They are trying to melt down this iceberg of illiquidity (that has) frozen all of the markets up,” said Roy Smith, a professor of finance at New York University’s Stern School of Business.
Several experts spoke Monday about what Wall Street’s debacle and the Fed’s response could mean to consumers.
Question: What does all of this add up to for Main Street?
Answer: “By protecting Bear Stearns from failure, the Fed prevents the ripple effect,” said Pearl Kamer, chief economist at the Long Island Association in New York. “It keeps the pipeline open. Creditworthy individuals or businesses can still get a loan. Had the credit markets frozen up completely, that would not have been possible.”
“Oil is more expensive because of what’s been going on in the Wall Street crisis,” said Steve Gross, a principal at Penso Capital Markets, an investment firm in Cedarhurst, N.Y. “Imports are more expensive, and housing prices are going down.”
Q.: What does this mean for consumer credit, such things as mortgages and credit cards?
A.: The crisis is causing the banks “to overcorrect to achieve the balance they are optimally seeking,” said Kris Niswander, associate director of financial institutions at SNL Financial in Charlottesville, Va. “You are not going to find (mortgages with) 95 percent (financing). You are going to be required to have larger down payments. Banks “are going to do their due diligence a little heavier now than they were doing six months ago.”
“Home equity lines of credit will be harder to get,” Kamer said.
And it’s going to be tough for consumers to “raise ceilings on credit cards.”
Q.: Will the Fed’s moves stave off a recession?
A.: “I think we are in a recession,” Kamer said. “What the Fed did was try to prevent it from becoming a deeper and longer recession.”
Q.: Is the Bear Stearns rescue just the tip of the iceberg?
A.: “We are at the beginning of a long process of de-leveraging ... squeezing the debt out of the economy,” Kamer said. “I think it has a couple of years to run out, and we don’t know what is going to be popping up.”
