The de facto Nationalization of JPMorgan Chase

By Dr. Mark W. Hendrickson

March 2008 may go down as a major turning point in U.S. financial history. The Federal Reserve crossed a Rubicon of sorts, lending tens of billions of dollars, not to a commercial bank, as has been its historical practice, but for the very first time to an investment bank.

For the record, commercial banks pay the Federal Deposit Insurance Corporation—FDIC—for deposit insurance, whereas investment banks do not, and yet the Fed suddenly made liquidity available to the latter. Commercial banks are legally allowed to use leverage to a maximum ratio of 13 dollars of debt to every dollar of equity, whereas investment banks—ironically subject to less regulatory oversight than commercial banks—can leverage their equity by a factor of 34.

Invoking an obscure, never-before-invoked legislative provision, the Fed made billions of dollars available to JPMorgan Chase to acquire another investment bank, the essentially insolvent Bear Stearns.

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