FRB Power Play, As Economy Slows Down

When the big news was breaking last week about the Federal Reserve lead JP Morgan Chase take over of Bear Stearns, a little known fact was making news with Wall Street insiders and stockholder activist groups. That issue revolved around the US government, in the form of the US Federal Reserve (FRB) working with a private company JP Morgan Chase to take over another private company, Bear Stearns, in a hostile take over. Since most Americans do not understand the laws on the books that public companies entering into merger agreements must follow, here is a brief explanation of how the FRB sidestepped laws in order to save Bear Stearns from itself and to prevent a further decline in the US economy.

Public companies in the United States are owned by the people that buy stock in that business. When JP Morgan Chase changed their purchase price from $2 per share to $10 per share, that decision was not placed before the shareholders for a vote before it was rushed into place by the Bear Stearns board of directors. Under normal circumstances the board of directors at Bear Stearns could face legal consequences for making a decision to change the selling price of their company without putting that change up for a vote to the companies shareholders. While this Federal Reserve move was taken under unusual circumstances in an effort to spare the US economy from further damage, it does none the less provide a precedent for future government action against public companies that might not be in danger of implosion.

While scores of lawsuits have already been filed as a result of the JP Morgan Chase take over of Bear Stearns, I doubt if these lawsuits will make that big of a difference in the overall structure of this Federal Reserve lead hostile take over of that company. What concerns me the most is the way in which the federal government sidestepped the laws of the land in order to quickly take over Bear Stearns, by JP Morgan/Chase proxy, in the first place. The United States is a government of laws which must be followed by government and private citizens alike. This hostile take over of Bear Stearns by the FRB and JP Morgan Chase should send chills down the spine of regular Americans who have their savings and retirement dollars invested in stocks.

While the takeover of Bear Stearns can be explained and probably justified by the federal government, there will come a time when this new found power of the Federal Reserve Bank (FRB) will be used in a not so justified way. When that happens, American investors will look back on the JP Morgan Chase deal to take over Bear Stearns and see the mistakes that were made in that transaction and ask themselves why no one objected to that much government intervention when it happened. The truth is that Americans in the public, private and government sectors of the US economy are so afraid of an economic collapse, that they are forgetting how the capitalist US system is set up and also forgetting that when the economy does unravel it will be worse because of their short sighted actions, instead of better.