We Have Just Witnessed History

Not since the reign of FDR have we witnessed as much government and regulatory involvement in the financial markets of our country. Although not written in the Constitution, traditional capitalism no doubt has as one of its greatest tenants the separation of government and business to the maximum extent possible.

Traditionally the role of our Federal Reserve was to regulate banks and to act as the "lender of last resort" to these same banks in an effort to protect the public interest and maintain stability in the banking sector. Mission accomplished. During the last couple of weeks the Fed has taken the unprecedented-in-modern-times step of offering lending to the nation's largest investment banks, not just the largest commercial banks. Additionally, the Fed is taking on a much broader and deeper pool of collateral as backing for these loans as well. Industry estimates indicate that the largest investment banks have borrowed an average of about $30 billion daily under this new Fed facility.

Keep in mind what the markets have been experiencing during the last few months. They have been experiencing a lack of confidence, a lack of visibility and a lack of transparency. They have not been experiencing a lack of capital. By all measures Bear Stearns was well capitalized before the Fed forced its fire-sale to JP Morgan. Bear suffered a lack of confidence, not capital.

I'll be the first to stand up and err on the side of less government regulation and intervention, but in this case I believe it was entirely warranted. I don't believe it was warranted for the sake of Bear Stearns, but for the greater good (I hate that term) of the global financial picture. Temporary intervention is good, permanent and long-term intervention is not so good. Yes housing prices are down and most of our venerable institutions have been forced to take huge write-downs, but do I think the value of the assets will dwindle to zero? Of course not. The markets will correct and buyers and sellers will come to terms on price. But this must and will occur in an environment of transparency. The Fed actions have laid the foundation to provide this transparency and the beginnings, at least, of an underpinning of stability has been fostered in the last few days between the financial institutions.

Bear Stearns Sold To JP Morgan

This was an active week in the financial markets. In fact, this was an historic week in the financial markets. We saw a huge interest rate cut from the Federal Reserve, the seemingly overnight disappearance of a venerable investment bank, and three days of triple digit swings on the Dow Jones Industrial Average.

The week started with the news on Sunday that the Treasury had assisted in the sale of Bear Stearns to J.P. Morgan Chase. It was a maneuver designed to ensure that Bear Stearns could open for business Monday morning following a dramatic drop in liquidity as firms that traded with Bear began to question whether Bear would be solvent to complete the trades. Although terms are not finalized, the purchase price is likely to be $2 per share, after Bear Stearns closed last Friday at $30 and Thursday at $57. This rapid deterioration is a reminder of the downside of leverage and the importance of liquidity.