
For the first time in decades, the Fed has used an obscure power it has to provide a loan to another financial institution.
What it basically gives the Fed power to do is lend directly to a financial institution other than a bank, which is what it did in the Bear Stearns (NYSE: BSC) case.
J.P. Morgan Chase & Co. (NYSE: JPM) is also involved, but they are simply being used a a middle man to funnel the money through; the Fed ensures us that they have no liability in reference to the loan itself; Bear Stearns has offered colateral, which the loan is solely based on.
"J.P. Morgan is not liable if Bear Stearns defaults, so the Fed is looking to the collateral of Bear Stearns," said Lou Crandall, chief economist at Wrightson ICAP.
As for the loan itself, specifics weren't revealed on today's conference call, with executives from the company refusing to talk about how much the loan will be for or its length, although J.P. Morgan did say the initial lending period would be for 28 days.
What type of credit line Bear Stearns gets will depend on their credit needs, as well as the collateral showing on their books, said one Fed employee.
In accordance with the law, the board of governor's of the Fed had to vote to approve the loan, with the four present voting 4-0. On governor wasn't at the meeting because of travel conflicts.
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