Bear Stearns

Socialism for the rich continues unabated! Apparently, Bear Stearns has got a helping hand from the US Federal Reserve.

Barry Ritholtz says so in Bove: Fed Rescue for Bear Stearns:

Pretty wild stuff -- $200 Billion in Fed lending against junk paper, to bail out one mid-size investment bank.

And the market's reaction: Dow up 3.55% (417 points), Nasdaq +4% or more than 86 points, S&P500 up 3.7% or 47 points

Ain't Socialism grand?

Emphasis in Original

However, CNN Money is reporting an UPDATE: Fed Action May Have Targeted Bear Stearns: Analyst who is Brad Hintz, an analyst at Bernstein Research.

Still, the Fed's move doesn't help banks and brokerage firms reduce their exposure to mortgage securities, collateralized debt obligations and other troubled assets like leveraged loans, Hintz said.

It "will do nothing to help this daisy chain of de-leveraging," he wrote.

The Fed is helping banks and brokers borrow money more easily, which will help them finance these exposures for longer. But the central bank isn't helping them sell these securities, Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business, wrote in an email on Tuesday.

"This is precisely the wrong type of bailout," he said. "The Federal Reserve is warning of capital deficiencies in the banking sector, which cannot be fixed with loans."

So, the US Federal Reserve is doing what sensible bankers and pawnbrokers won't do.

1. You take along an IOU from Aunt Gladys (sub-prime mortgage for Bear Stearns) to your local bank manager.
2. You produce a letter from Uncle George saying that the IOU is good (Bear Stearns would point to the AAA credit rating).
3. The bank manager believes you (US Federal Reserve trusts Bear Stearns).
4. The bank manager takes the IOU and gives you the keys to his car (US Federal Reserve takes the mortgages and gives Treasury Bonds to Bear Stearns).
5. You take the car to the pawnbroker to get a loan (Bear Stearns offers the Treasury Bonds as security for more loans).

What could go wrong?