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By Root 837 0

Spitzer’s escapades would not even be a crime. Unfortunately for Mr. Spitzer, the news did not break in Amsterdam, it broke in New Amsterdam. Spitzer neutered himself. In his previous role as attorney general of New York, he oversaw the organized crime task force that prosecuted prostitution rings. By Spitzer’s own standards, he was done. On the day Spitzer’s article appeared in the Washington Post, the then-governor of New York and alleged Client 9 of the Emperor’s Club VIP, gave his many enemies the ammunition they sought. He allegedly met with call girl “Kristin” in room 871 of Washington’s Mayflower Hotel and paid her $4,300. The post-911 Patriot Act, legislation allowed authorities to track Spitzer’s legal money transfers and record cell phone conversations referring to the alleged illegal prostitution transaction. The Bush administration could not capture Osama Bin Laden, but it got “Sheriff ” Spitzer.4

His downfall is a tragedy for those trying to balance the scales of justice in the financial markets and a cause for snide soaked relief among the many targets of his investigations. Yet, for Spitzer himself, there is little pity; he engineered his own political suicide by cop. Spitzer announced his resignation as governor of New York on March 12, effective at noon on March 17, 2008. News of his disgrace broke just in time for the Fed to announce its $200 billion liquidity bailout that for the first time extended directly to investment banks and indirectly to private equity funds and hedge funds. His resignation occurred the same day the JPMorgan Chase announced its Federal Reserve and Treasury orchestrated purchase of Bear Stearns.56

Among other issues with the Fed actions, just as with its liquidity bailout of Countrywide in August 2007, there was no quid pro quo. The Fed does not regulate investment banks, insurance companies, private equity firms, hedge funds, or thrifts. If it is going to hand out our money, it should ask for concessions designed to make the U.S. financial system safer—to do otherwise ratchets up moral hazard.

Yet, just as with the August 2007 liquidity bailout of Countrywide, the Fed extracted no concessions when it aided JPMorgan’s purchase of Bear Stearns and when it handed out massive liquidity to highly leveraged investment banks in the first quarter of 2008. It opened the national purse and let investment banks reach in.

In early April 2008, Fed Chairman Ben Bernanke testified before the U.S. Senate’s Committee on Banking in a speech devoid of inflationary language. His reason for the Federal Reserve’s agreement (in consultation with the Treasury Department) to provide funding to Bear Stearns through JPMorgan Chase was “to prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences for market functioning and the broader economy.”7

What happened to the $30 billion in Bear Stearns’ mortgage-backed products that the Federal Reserve bought through JPMorgan? From March to June 2008, it lost more than more than $1.1 billion in value; it has already eaten through JPMorgan’s $1 billion “cushion” and is now eating into taxpayer dollars. It is a sticky bomb, as dangerous as the makeshift explosives stuck to tanks during World War II. In June 2008, the Fed admitted that it priced the assets as if we were in an “orderly market.”8 But we are not in an orderly market, so the price should be lower, meaning we do not know how much taxpayer money is at risk. Who is helping the Fed price these securities since it cannot price the sticky bomb itself ? Blackrock. Blackrock lost money when it invested in the Peloton fund that bought overrated and overpriced mortgage backed securities. They should know all about getting taken for a ride. Jamie Dimon claimed he by no means saddled the Fed with Bear Stearns’s riskiest assets. Given the performance of the assets the Fed took on board, JPMorgan’s shareholders may not feel reassured by Jamie’s testimony before the Senate Banking Committee.

Bernanke seems to think the Bear Stearns bailout did not create a moral hazard problem,