Friday, April 04, 2008

Bear’s Discount-Window Woes

In a column written just after the Bear Stearns meltdown, I asked whether the venerable old firm was made a sacrificial lamb. Was Washington sending Main Street a signal that a big Wall Street firm could fail?

There’s still a lot here that I don’t know. I don’t know the value of Bear’s collateral, the counter-party story, and so forth. However, if the Fed had changed its discount-window policies earlier, to reflect the post-Glass-Steagall era, Bear Stearns could have accessed short-term Fed loans. This could have made all the difference in the world.

Better yet, had the Fed opened the discount window to the broker-dealers last August, when the credit storm first hit, the economic and financial landscape would look quite different today. Instead of a run on Bear Stearns, and all the other market-related ruptures, we would have had greater stability earlier in the game.

Here’s what a very anguished Bear Stearns CEO Alan Schwartz had to say in his testimony before the Senate Banking committee yesterday:

It’s my strong belief that by every measure that I can think of, that our balance sheet, our capital ratios, our risk profile, lined up well with all of our leading competitors. So I do believe that if as a policy measure the discount window had been open to investment banks for their high-quality collateral, I think it’s highly, highly unlikely in my personal opinion that we’d be in the situation that we find ourselves in today.
Some additional perspective from guests on last night’s Kudlow & Company:

Vince Farrell, managing director of Scotsman Capital: “The discount window should have been opened [to non-commercial banks] ten years ago. You and I agree on that one. Glass-Steagall was repealed. They should have treated investment banks and commercial banks the same … I agree with Al Schwartz that it should have been opened, and Bear Stearns would not have gone out. I personally believe that Bear Stearns was thrown under the wheels of the bus for several reasons. Principally among them, the regulators wanted to show — Treasury Department included — that we’re going to discipline our system … So I think from the regulators’ viewpoint, they’re probably thinking, “Okay, we did it alright; what we had to do was sacrifice Bear Stearns, so be it.”

Mike Ozanian, Forbes magazine senior editor: “I think they should have let Bear go to the discount window earlier. I think it would have saved Bear. That would have been the right thing to do … As a guest on your show a couple of months ago, it was my belief that instead of just bashing down the fed funds rate, the Fed should have been using the discount rate at the beginning. And I think it would have been able to spot and identify problems in the banking sector instead of reflating the entire economy. So not only do I think it would have been better for Bear Stearns — and I agree with your column — but I think it would have been better for the overall economy.
The bottom line in all this is that Bear Stearns should have been given the opportunity to access the discount window earlier in the game.