U.S. Treasury could profit from $30 billion support of Bear Stearns, though it’s unlikely

By DAN CATERINICCHIA
AP Business Writer
Published: March 18, 2008

WASHINGTON (AP) - While the Federal Reserve’s pledge this week of $30 billion to support a crumbling investment bank carries financial risks, it also could yield a profit for the government.
JPMorgan Chase & Co. on Sunday agreed to buy Bear Stearns Cos. Inc. for the fire-sale price of about $260 million after the Fed stepped in with a $30 billion line of credit to back up the least desirable assets of the firm, which had bet heavily on the mortgage market. The Fed’s action was intended to stabilize the value of assets linked to the U.S. mortgage market and thus prevent further damage to big banks.
Since JPMorgan has said it is taking “reasonable risk” in acquiring Bear Stearns, the Fed’s exposure is probably much higher and makes it “highly doubtful” that the government will turn a profit, said Joseph Mason, an associate professor of finance at Drexel University in Philadelphia.
If money can be made on the deal, a purely private-sector buyout could have been arranged, but “the markets right now are so opaque, and have been for so long, that investors don’t know what to believe,” Mason said.
Still, the last time the government provided a multibillion-dollar security blanket to corporate America it did make a profit. That was after the Sept. 11 terrorist attacks, when struggling airlines received loan guarantees.
The federal Air Transportation Stabilization Board, which was created after the attacks to aid the recovery of airlines, made just under $350 million from its $1.56 billion in loan guarantees to six carriers. The government’s profit came from loan guarantee fees and stock warrants in the airlines, said Brookly McLaughlin, a spokeswoman for the Treasury, which oversaw the board before it completed operations last year.
A profit this time around would be a bonus, but the government’s main goal is to stabilize the economy, said Bernard Baumohl, managing director of The Economic Outlook Group in Princeton, N.J.
“In truly extraordinary circumstances ... when there’s a dramatic imbalance that could potentially trigger a recession, the government does have to get involved,” Baumohl said.
The appropriateness of the $2-per-share price was called into question on Tuesday after shares of Bear Stearns gained $1.10, or 22.9 percent, to close at $5.91 Tuesday following first-quarter results from Lehman Brothers and Goldman Sachs that beat Wall Street estimates and the Fed cutting a key interest by three-quarters of a percentage point.