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The Panic of 1907 was eventually resolved when J.P. Morgan organized a group of bankers to keep the credit markets functioning. The U.S. Treasury kicked in $25 million to the cause. In other words, the government wasn’t powerful enough to lead this itself. It had to transfer money to private bankers.

One of the repercussions of Morgan’s aid was that some people felt that it might not be a great idea to have one person act as a lender of last resort. The Panic of 1907 eventually led to the creation of the Federal Reserve.

One hundred and one years later, the Federal Reserve combined with JP Morgan Chase (JPM), the company, not the man, to bail out the economy.

Scratch that, this isn’t a bailout. JP Morgan is buying Bear Stearns for $2 a share. What if I told you last week, when shares of BSC were at $70, that they would soon be less than a gallon of gas? You might have thought that gas was the one that rose.

The idea that this move will create some sort of moral hazard simply doesn’t wash. This company was effectively wiped out. Few bankers are going to feel comforted by a $2 share price. Last year, shares of Bear were going for $150 a pop. Today, they’re worth less than a gallon gas.

The Fed did what it’s supposed to do. The problem with Bear failing is counter-party risk which means that if Bear went under, a lot of other folks would have taken a big hit as well. Really, there wasn’t much of a choice.

The WSJ reports:

To help facilitate the deal, the Federal Reserve is taking the extraordinary step of providing as much as $30 billion in financing for Bear Stearns's less-liquid assets, such as mortgage securities that the firm has been unable to sell, in what is believed to be the largest Fed advance on record to a single company. Fed officials wouldn't describe the exact financing terms or assets involved. But if those assets decline in value, the Fed would bear any loss, not J.P. Morgan.

Sorta like 1907.

Posted by edelfenbein at March 17, 2008 7:23 AM