Fed's Bailouts: Money for Nothing

$2 can buy you a lot of things. Even today, with the dollar approaching historic lows, $2 goes a long way in most places on earth. It can get you a burger at McDonalds, or a Pound Sterling, or even a month's supply of medicines for a child in sub-Saharan Africa (Thanks for the references, Elon). On Wall Street, it is a small fortune, if today's news is anything to go by.

In a deal that was fast-tracked by the federal government to avoid bankruptcy of Bear Stearns, the nation's fifth-largest investment bank, JP Morgan announced that it was buying out the beleaugured said bank for $236.2 million, at $2 a share, in a press release issued before the markets opened today. This price was a fraction of its book value less than month ago. The Federal Reserve (Fed) and the US government did their part by extending a gurantantee of $30 Billion of Bear Stearns assets.

I am confused. First, on March 11th, the Fed bails out investment banks by giving them a $200 billion gift - essentially, an offer to buy their AAA-rated debt in exchange for treasury bonds. This, after it was revealed that said banks had made some rather questionable decisions with their excessive exposure to the subprime market, contributing to the world-wide credit crisis. In effect, the Fed (ergo, the tax-payer) is paying for the mistakes of a few greedy suits at the nation's top investment banks.

The reasoning goes that not doing so would lead to a severe liquidity crisis, which apparently, is much worse than what the financial markets are facing right now. Fair enough. But surely the people who led us to this situation will have to pay for their mismanagement, right? Absolutely, but only if you count multi-million payouts for outgoing CEO's as punishment. To add insult to injury, the hedge funds that have contributed to this crisis by their short-plays, stand to gain from the fall in the market indices by covering their short positions.

So, the lesson from the Fed for irresponsible lenders for creating a crisis that has led to a global credit contagion? No worries. Mistakes happen. Oh, and here is $200 Billion to help ease your troubles. The lesson for the average investor like you and me? If your market investments have lost a significant portion of their value largely due to a crisis that was created by a select group of lenders, tough luck to you.

Finally, here are some numbers for you to ponder: Chuck Prince, Citi's ousted CEO, left with vested stock holdings valued at $94 million and roughly $53.1 million in salary he received over the four years during his tenure as CEO. He also received a pension of $1.74 million and another one million stock options. That's a lot of $2 bills.

In the meanwhile, I am off to get a burger at McDonalds. Unlike the Fed's largesse, which keeps giving, the burger at the Mac is a limited time offer.