Money-Rx Blog

Here we go again. After every major financial scandal, Congress has to step in with inquiries and hearings. Other than the fact that these hearings very rarely provide any new information, inform Congress or the public with specifics, or end up blaming anyone, it also shows how ineffectual Congress is, since no one asked them for an opinion when the deal was being hammered out and they're in no position to find out exactly what happened or who is to blame.

Steven Pearlstein, Washington Post, hits the nail on the head with a column titled 'Hypocrisy that's hard to bear'. Seriously, folks, this isn't the time for members of Congress to come sauntering back from another of their vacations and begin second-guessing the battlefield judgments of Fed and Treasury officials who have been working day and night to prevent a meltdown in global financial markets.

Good for entertainment value, though. The Senate Banking and Finance Committee's have both scheduled hearings on the Fed's role in the Bear Stearns deal. And Rep. Henry Waxman's House Oversight and Government Reform Committee is digging up all the dirt they can on the deal, so they can put Fed & Treasury officials on the stand and make them squirm.

Elana Schor, Guardian, UK, reports that Chris Dodd, the chairman of the Senate banking committee, scheduled an April 3 hearing on the Bear purchase and released a list of invited witnesses, including US treasury secretary Henry Paulson, Federal Reserve chairman Ben Bernanke, JP Morgan CEO James Dimon and Bear Stearns CEO Alan Schwartz. "Had the merger between JP Morgan Chase and Bear Stearns been a routine transaction between two private entities, such an event might not merit public examination," Dodd said in a letter to the witnesses. "But because this transaction has put public funds at risk, [banking] committee review is not only warranted, but necessary."

In a separate but similar effort, the top Democrat and Republican on the Senate finance committee - which oversees the US debt, while the banking panel focuses on the markets - sent letters to the same witnesses invited by Dodd. The two senators, Max Baucus and Chuck Grassley, have asked for the names of all private and public entities that helped negotiate the Bear deal and what types of mortgages owned by Bear may now be guaranteed with the US taxpayers' money. The latter question could prove especially thorny if the senators discover that public funds were promised to JP Morgan as an incentive to buy up bonds backed by shaky subprime mortgages.

And the Wall Street Journal cites an unnamed Waxman staffer as saying that Rep. Henry Waxman, D-Calif., who heads the House Oversight and Government Reform Committee, wants to take a closer look at what the potential taxpayer exposure may be. If Waxman is getting in on the act, then there's sure to be some fireworks, because whatever else you may think or say about him, one thing that has to be admired is the impeccable research he and his staff do before hearings. He has this uncanny ability of digging up obscure memos and emails with incendiary information which makes witnesses squirm and sweat when they're testifying before Congress. The kind of stuff which makes headlines.

So starting April 3, you can expect reams of ink and paper to be devoted to a post mortem of the Bear Stearns deal, the Fed's liabilities, the state of decay of Bear Stearns' assets and a quantification of JPMorgan's gains, not to mention the basic and most important question - Does Congress have guidelines for any future bailouts and use of public funds to save the skins of Wall Street investors? By luck or by design, the Fed has bumped into something here which saved Wall Street from collapsing into itself like a spent star turning into a black hole. If these hearings influence the Fed's future actions and curtail their involvement in any future 'bailout situation', it could have a monumental impact on the markets.

Update: From the New York Times - The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system. According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms. The plan would merge the S.E.C. with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like.

Sweet timing. Just in time for the Congressional testimonies. Henry Paulson is one smart cookie.