Toomre Capital Markets LLC

Toomre Capital Markets LLC ("TCM") has previously written favorably of New York Federal Reserve President Timothy Geithner in the posts Bear Stearns: U.S. Banking Committee Starts Looking At Regulatory Change and Suggested Reading: Timothy F. Geithner Speech on Credit Derivatives. New York Fed President Timothy Geithner has been the Federal Reserve's point person dealing with Wall Street during the on-going credit crisis that seemingly started last year with the collapse of two Bear Stearns hedge funds that were highly leveraged and highly exposed to sub-prime mortgages and Collateralized Debt Obligations ("CDOs"). His active involvement in trying to stabilize the bursting of the housing bubble culminated with his prominent involvement with the March 2008 rescue of Bear Stearns which is expected to formally taken over by J.P. Morgan Chase & Co. on Friday, May 30^th 2008.

Since the Bear Stearns rescue effort unfolded in mid-March, there has been considerable criticism of the Federal Reserve and Treasury Department brokered sale of Bear Stearns to JP Morgan, particularly around the issues of moral hazard and the Federal Reserve's ability to act as an 'honest broker' in future financial crises. On the front page of the May 30^th 2008 edition of The Wall Street Journal, there is an article written by Greg Ip entitled Fed's Fireman On Wall Street Feels Some Heat that summarizes some of the criticism still being directed at Timothy Geithner. The article contains the interesting reference that "As early criticism of the rescue swirled, the president of the Dallas Fed, Richard Fisher, sent Mr. Geithner an email in Latin: 'Illigitimum non carborundum,' along with his translation, 'Don't let the bastards get you down.' Mr. Geithner replied that his grandfather had the same slogan on his kitchen wall."

Toomre Capital Markets LLC for one is glad that Mr. Geithner pushed for the Federal Reserve to lend $29 billion to JP Morgan to facilitate the latter's takeover of Bear Stearns on Sunday, March 16^th 2008. Although some rather ignorant Congressmen claimed that the Federal Reserve's participation "exposed the American taxpayers to unknown amounts of financial loss", TCM is sure that such politicians would have been singing a much different self-serving tune had Bear Stearns filed for bankruptcy early the next Monday morning. Many people who are not intimately involved with the Capital Markets do not appreciate how intricately the various investment and global commercial banks have become through derivative contracts and particularly what are known as Credit Default Swaps ("CDS").

Had Bear Stearns declared bankruptcy that next Monday morning, who knows what would have happened? Certainly, given the extreme negative sentiment that existed in the credit markets at that point, the equity markets could well have declined more than a thousand Dow points and various investment banking stocks like Lehman Brothers and Merrill Lynch likely would have declined precipitously. Who knows what would have happened in the much larger fixed-income markets that day as the approximately 5,000 Bear Stearns counter-parties scrambled to seize and sell various pledged collateral amounts. One might well to also recall that the fixed-income markets were virtually shut down the week before and that there likely would have been little or no bid for other fixed-income securities as everyone focused on self-preservation, just where they stood in terms of risk exposures and trying to fund themselves. Surely, the repo market would have seized up and the Federal Reserve would have had to pump many, many billions of liquidity into the financial system at who knows what eventual cost to American tax-payers.

Hence, while there may now well be more moral hazard risk in the American financial system, TCM strongly feels Mr. Geithner is a nod of a gratitude for preventing a complete systemic breakdown back in March 2008. Reader comments and thoughts are welcome.