Follow-up: Move over eagle ...

I was remiss in neglecting one key component of the Bear Sterns fiasco in my earlier post: what's in it for the government.

Uncle Sam isn't just all warm-fuzzy altruistic here. True, their action drips with populism, but that's not their biggest bennie. Mark my words - the Treasury, and Federal Reserve, in orchestrating this, has effectively bought themselves greater involvement in the financial markets, especially corporate finance. Their take is most likely increased oversight, probably including approval authority in financial M&A transactions and OTC product markets.

This might have appeared to be an opportunistic grab had it not been one of a growing pattern of strategic moves by the Bernanke house to expand their pervue. Opening the discount window to i-banks and brokers was clear back scratching. See, currently the Fed has no involvement with these firms - it's the SEC's job. Over the past decade, with the relaxation of Glass-Steagal regulations, i-banks have weaseled their way into being allowed to carry credit on their alance sheets (=make loans in exchange for other juicier business). Basically, i-banks are acting more and more like real banks. The Fed's had their knickers in a bunch for years over this because they don't think the SEC understands how to regulate banking activities (more on this in my next blog). So the Fed does i-banks the "favor" of letting them borrow from the Fed cheaply (although they're not member firms) but the price of admission is that the i-banks must pledge collateral for those loans .... and (here's the juicy part) ... the Fed gets to scrutinize the collateral .... which is almost always .... (drum roll) ... loans. Through this keyhole, the Fed will be able to project a large portion of what goes on inside the firm. They can let the i-banks get hooked on cheap discount window money, and then progressively tighten the screws of oversight ... and eventually regulation. For one thing, this will give the Fed the data-driven ammo to prove that the SEC is clueless, at which point they can swoop in and save us all.