Magazine article American Banker

In Focus: Will Bear Plan Break Crisis Policy Logjam?: Some See a Catalyst for New Approach on Housing, Other Issues

Magazine article American Banker

In Focus: Will Bear Plan Break Crisis Policy Logjam?: Some See a Catalyst for New Approach on Housing, Other Issues

Article excerpt

The Federal Reserve Board's decision Friday to shovel money into Bear Stearns Cos. through JPMorgan Chase & Co. may prove to be the turning point in the policy debate over a range of issues, including a rescue for the housing market and a restructuring of financial oversight.

"What's needed here is a paradigm shift in terms of the regulatory environment and the economic policies of this country," said former Comptroller of the Currency Eugene Ludwig, now the chief executive of Promontory Financial Group. "Without it, we risk a slide into second-class economic status."

Some of the lawyers and analysts who make a living parsing the implications of policy moves congratulated the Fed on dodging a bullet.

"Bear is one of the biggest custodians on Wall Street. You can't let them go under. You'd have a bank holiday on Monday," said Christopher Whalen, the managing director at Lord, Whalen LLC's Institutional Risk Analytics. "The Fed is doing the right thing. This is their job."

Over the last two months the central bank has been forced to come up with increasingly creative ways of injecting liquidity into frozen markets.

"I have never seen such dramatic change in public policy, literally overnight. It really seems ad hoc, like the Fed is saying, 'Nothing seems to be working. Let's try something else,'" said one banking lawyer, who requested anonymity for fear of angering large-bank clients. "It's like the little boy sticking his fingers in the dike, but the boy is running out of fingers."

And there is a fear that Bear Stearns could be the first of many at the Fed's window.

"I think you're going to have folks standing up right and left saying, 'How about me?'" said another bank lawyer who did not want his name used.

Rodgen Cohen, a partner at Sullivan & Cromwell LLP, recognized the moral hazard but drew a distinction, saying the Fed is addressing a market abnormality, not aiding an insolvent company.

"You have to balance the pros and the cons and the circumstances, and the pros so outweigh the cons here," he said.

But the Fed's move does reinforce how fragile the financial markets are, and that should propel efforts on Capitol Hill to enact legislation designed to help homeowners avoid foreclosure. It also points up, yet again, how complex and nontransparent the financial markets have become. That should fuel moves to improve oversight and disclosures.

The chorus of people blaming mark-to-market accounting continued to grow Friday, and some said the Fed's move should help convince the Securities and Exchange Commission that it needs to intervene.

"FAS 157 is the root of the problem. It is forcing companies to write down good assets just because they are illiquid," Mr. Whalen said. "The SEC needs to have an emergency meeting and rescind FAS 157. …

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