Bottom? What bottom?

COMMENTARY

By Robert Lenzner

updated 6:18 p.m. ET April 9, 2008

Give Fed Chairman Ben Bernanke credit for a creditable defense of the JPMorgan Chase-Bear Stearns transaction, as well as a sobering wake-up call about the multiple frailties of the financial markets, and the economic scene.

In retrospect, we'd would be hard put to argue the bear market is over, the recession will be moderate and short, and the bottom has been seen in financial stocks. I agree with Christopher Wood, chief strategist of the Credit Lyonnais Securities Asia brokerage, that "the Fed's unprecedented action has only delayed market clearing Japanese-style and certainly does not mark a definitive bottom." We also hear of well-known investment professionals who are harboring considerable cash balances. This past weekend legendary investor George Soros called the crisis "a time of the destruction of values." He did not make it sound as it was over by underscoring that the Fed is at "a point of no return. It cannot prevent a recession or the increased unwillingness to hold dollars" around the globe.

Despite the angry outcries of politicians, Bernanke's reasoning for preventing Bear's bankruptcy was powerful. Mull this over at least twice.

"Our financial system is extremely complex and interconnected," Bernanke told Congress last week. "With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company's failure could also have cast doubt on the financial positions of some of Bear Stearns' thousands of counter-parties."

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Bernanke continued his warning that such a "chaotic unwinding" — if it could have been accomplished at all — would have triggered disorder across asset values in the rest of the economy as well.

Moreover, Bernanke's sidekick at the New York Fed, Timothy Geithner, added, "Had we not acted, we would in effect have penalized those individuals, companies and financial institutions that had behaved more prudently, but would have suffered significant damage from the effects of default by a major institution."

Obviously it was crucial for the Fed to initiate a radical change in policy to maintain the stability of an institution — Bear Stearns — it doesn’t even regulate or supervise. Radical is also the word for Bernanke’s opening of the discount window to all nonbank broker dealers that are among the primary dealers in Treasury securities on behalf of the Fed. Never before has the Fed lent a $29 billion underpinning to a bank taking over a nonbank either. Had these steps not been taken we will never know the destruction that might have ruined more than defaulting homeowners.

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