http://www.courant.com/…

The former chief risk officer at investment bank Bear Stearns Cos., which nearly collapsed in March, is now a senior official of the Federal Reserve division that supervises U.S. banks.

Michael Alix, who worked at Bear Stearns for 12 years and was its senior risk manager since 2006, was named a senior vice president in the bank supervision group of the Federal Reserve Bank of New York, according to a Fed announcement.

The appointment is apt to raise questions because of the key role Alix played at Bear Stearns and given the Federal Reserve’s role in Bear Stearns’ sale to JPMorgan Chase & Co. after its breathtaking slide. In his new job at the central bank, Alix will help oversee the financial safety and soundness of banks, which are inspected by Federal Reserve examiners.

The inmates are running the asylum. But we already knew that.

The story is a few days old but it’s worth repeating.

http://www.bloomberg.com/…

The cost of protecting against losses on Treasuries rose to the highest in almost four months on speculation any financial support for mortgage lenders Fannie Mae and Freddie Mac may cost the U.S. government its AAA rating.

Credit-default swaps on Treasuries increased 4 basis points to 18, according to CMA Datavision prices at 2:30 p.m. in London. The 10-year contracts are near the record 19 basis points when the Federal Reserve backed the bailout of New York- based brokerage Bear Stearns Cos. on March 17.

Senior Bush administration officials are considering a government takeover of one or both mortgage lenders, according to a person familiar with the discussions. Fannie Mae and Freddie Mac have about $5.2 trillion in debt outstanding, exceeding the Treasury’s $4.6 trillion in notes. Standard & Poor’s said in April that possible support of government- sponsored lenders posed a threat to the government’s top rating.

“The ratings agencies said the risk for the U.S., if it bails out Fannie and Freddie, is it could lose its AAA rating,” said Andrea Cicione, a London-based credit strategist at BNP Paribas SA. “It is clearly a possibility, albeit a remote one.”

Investor speculation the government will provide support helped drive down the cost of default protection on the mortgage companies’ senior debt. Credit-default swaps on Fannie Mae dropped 17 basis points to 62 and contracts on Freddie Mac fell 23.5 to 55, according to CMA.

Treasuries fell the most in three weeks, increasing the yield on the benchmark two-year note by 8 basis points to 2.49 percent, according to bond broker BGCantor Market Data.

Shares in Washington-based Fannie Mae and Arlington, Virginia-based Freddie Mac tumbled for a third day on concern the firms don’t have enough capital to offset writedowns. Their failure would deepen a housing slump that already is the worst since the Great Depression.

The companies, which own or guarantee about half of the $12 trillion of U.S. mortgages, may be able to count on a federal lifeline because they are too big for the government to allow them to fail, leading Republican and Democratic lawmakers said.

This is what government intervention gets you. Sit back and enjoy it. You’re paying for it.

http://www.smartmoney.com/…

J. P. Morgan Chase & Co. said Sunday evening that it is buying battered broker Bear Stearns Cos. for $236 million in a Federal Reserve-backed bailout unprecedented in scope and execution.

The Federal Reserve, which cut the discount rate in a coordinated move with its announced backing of the deal, is taking the extraordinary step of providing special financing in connection with this transaction.

The Fed has agreed to provide financing of up to $30 billion of Bear Stearns’ (BSC) less liquid assets. Roughly $20 billion of that funding will back mortgage securities held by the beleaguered brokerage firm.

J.P. Morgan (JPM) will exchange 0.05473 shares of its common stock for one share of Bear Stearns stock. Both boards have approved the transaction.

The deal offers Bear investors $2 a share, a massive discount to the firm’s closing price of $30 on Friday. A week ago the stock was trading above $60 and a year ago it was at more than $150. On Friday, Bear executives told analysts and investors that the firm’s book value - a measure of assets minus liabilities — was still at least $80 a share.

The destruction of billions of dollars worth of value in a matter of days shows how vulnerable even the biggest brokerage firms are to the current credit crunch. Bear’s business quickly crumbled last week as counterparties and clients lost confidence and stopped trading with the firm. Since being founded in 1923, Bear managed to survive all other crises, including the Great Depression.

And this shows how serious this whole situation is. This story is partially from Friday and the buyout and discount rate drop (first in almost 3 decades) this weekend. Ron Paul and the rest of the Austrians tried to make monetary policy and the economy a core aspect of this current US presidential race and was mocked by McCain, Romney, Rudy, Thompson and the others. Now the shit is hitting the fan, the Federal Reserve is likely to drop another 100 basis points. Some are saying that they may drop to 1.75%. What will the Fed do if we get toward 0% and we still have issues?

As Michael S. Rozeff said over at LRC:

There is no reason why the firm should not have been let fail. Its customers and lenders were abandoning it in a vote of no confidence. Why shouldn’t failures fail? The firm’s stock fell sharply and it will probably fail or be absorbed anyway. If Bear could not pay its borrowings to others, should they not suffer and feel the pangs of their errors? If Bear had to liquidate securities, should they not find a price at which investors are willing to hold them? Let the bankruptcies roll! Why is Bear favored and not others? How can a financial system in which risk plays a key role be insulated against downside risks when they come to pass? Only by shifting them to taxpayers. Main Street’s distrust of Wall Street is due for a resurgence now that the open and corrupt alliance between the Fed and its Wall Street favorites is coming out into the open. The spectacle of one bailout after another is disgusting and dismaying. The Fed is doing everything it can to prolong the financial difficulties and heighten their impact.

I wonder if we will see Bush call a bank holiday? I’d have to be a week just to keep from people freaking out over the call of the holiday.

UPDATE:

Snapshot of the bank’s stock prices at 12:00PM:

Is Lehman Brothers next to go?