Treasury says Bear Stearns deal 'necessary' to maintain financial stability

Thomson Financial delivered by Newstex) -- A top Treasury Department official told members of the Senate late last week that JP Morgan Chase's pending buyout of Bear Stears was 'necessary' to maintaining stability in the financial markets.

'Treasury is very supportive of this agreement, as well as the merger agreement between JPMorgan (NYSE:JPM PRH) (NYSE:JPM PRX) (NYSE:JPM PRK) (NYSE:JPM PRJ) (NYSE:JPT) (NYSE:JPM) and Bear Stearns (NYSE:BSC) ,' Assistant Secretary of Treasury for Legislative Affairs Kevin Fromer said in a March 28 letter to Senate staff.

'Among other things, these agreements were necessary and appropriate to maintain stability in our financial system at a critical juncture,' he wrote.

The letter was in response to a Senate request for information about the agreement, in particular whether the agreement might end up costing taxpayers.

In answer to this question, Fromer attached a March 17 letter from Treasury Secretary Henry Paulson to Federal Reserve Bank of New York President Tim Geithner. In this letter, Paulson said the NY Fed is loaning JPMorgan $29 billion for the buyout, and is taking billions of dollars worth of mortgage-backed securities owned by Bear as collateral.

Paulson acknowledged that this transaction could lead to losses at the NY Fed if those securities lose value, and agreed that in turn, this 'may reduce the net earnings transferred by the FRBNY to the Treasury general fund.'
Despite this potential risk, Fromer said Treasury and the Fed worked to minimize the risk posed to taxpayers. Fromer also said the private parties to the deal have the information requested by the Senate on issues such as full descriptions of the assets and more details about the transaction.

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