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").

On May 28^th 2008, The New York Times is reporting (via Reuters) that Liquidators Of Bear Stearns Funds Lose Court Appeal. Apparently the representatives of the two collapsed Bear Stearns Cos Inc hedge funds -- the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund -- linked to risky mortgage investments have lost a court appeal seeking to have the funds liquidated in the Cayman Islands instead of in the United States.

The ruling by U.S. District Judge Robert Sweet in Manhattan upholds a bankruptcy court's decision last year requiring that the funds be liquidated in U.S. courts. Holding the proceedings in the Cayman Islands, home to many hedge funds for tax reasons, could have shielded the funds' assets from some U.S. creditors. The ruling could have implications for other funds that seek protection under Chapter 15 of the U.S. Bankruptcy Code, which covers cross-border insolvencies. The judge upheld the bankruptcy court's finding that the funds' "center of main interests," as defined by Chapter 15, was in the United States.

"It is hoped that resolution of these issues may provide some aid to navigation in these uncharted waters," Sweet wrote in the decision, dated May 22 and made public on Tuesday.

"The process by which the financial problems of insolvent hedge funds are resolved appears to be of transcendent importance to the investment community and perhaps even to the society at large."

On Thursday April 3^rd 2008, there was enlightening testimony before the United States Senate Banking Committee regarding the acquisition of Bear Stearns by JPMorgan with the assistance of the New York Federal Reserve (and potentially ultimately the U.S. Treasury and common taxpayers). The first panel was composed of Federal Reserve Ben Bernanke, SEC Chairman Christopher Cox, Federal Reserve Bank of New York President Timothy Geithner and Treasury Undersecretary Robert Steel. The second panel consisted of JPMorgan Chase CEO Jamie Diamond and Bear Stearns CEO Alan Schwartz. Toomre Capital Markets LLC ("TCM") thought that a couple of key items emerged from the testimony of these two panels:

• Bear Stearn's liquidity disappeared virtually overnight declining from $12 plus billion to about two billion on Thursday, March 13^th.
• Federal Reserve Bank of New York President Timothy Geithner is really impressive and clearly a heavy-weight. Toomre Capital Markets LLC previously highlighted his speech on the credit derivatives issue in the post Suggested Reading: Timothy F. Geithner Speech on Credit Derivatives. TCM is quite reassured that this regulator is at the helm of the Federal Reserve Bank of New York during this time of credit crisis.
• The various regulators were not prepared to deal with a liquidity crisis at one of the primary dealers (and it is not clear if they have the authority to do so going forward).
• At the invitation of the SEC, Federal Reserve examiners are now on site daily at the top five investment banks: Merrill Lynch, Goldman Sachs, Lehman Brothers, Morgan Stanley and Bear Stearns. While the Federal Reserve officials do not have the authority to direct the investment banks to follow its directives, one can be assured that the Federal Reserve holds one very critically key trump card: The Federal Reserve is not required to lend to any institution and critically is unlikely to do so to any institution that it deems as "unsafe". Hence, if the investment banks want access to the Federal Reserve discount window, one can be rest assured that they will be following the Federal Reserve's "suggestions."