Why is the Fed Action Not Equivalent to a 'Pump and Dump' Scheme?

[Blackhatjack]

The Fed acts to prevent Bear Stearns from failing, to keep shares in the positive territory (and keep shares of other investment banks in similar situations from going negative) which gives investors in these entities time to unload their heavy positions and reduce the ultimate losses they will take --courtesy of the American Taxpayers' Money.

It is disingenuous at best... and conspiratorial at worst.

[Selatius]

1. It's not pumping and dumping because nobody technically advertised BR with a conflict of interest.

Pumping and dumping would be me buying Bear Stearns and then misrepresenting Bear Stearns condition in a bid to drive up its value. Then, when its price peaks, bail out and let the trailing investors eat the resulting loss when reality hits. That is illegal.

What we see today is the Fed simply capitalizing Bear Stearns less liquid (or perhaps totally insolvent?) assets to the tune of 30 billion. JP Morgan will buy what's left of Bear Stearns at 2 dollars a share.

[aquart]

2. "Simply capitalizing." NO idea what that means.

Innocent woolly lamb here.

[Selatius]

5. Basically, if you wanted your money pulled out of Bear Stearns, you can't. It's insolvent, but...

with the Fed kicking in 30 billion, that means you and everybody else who wishes to pull out their money are covered. Institutional investors, people who put in hundreds of millions to billions of dollars, want their money pulled out now. The problem is they all came to the bank at the same time. Given the nature of fractional reserve banking, the bank only had a fraction of the money necessary to cover all the withdrawal requests. The rest of the money was loaned out, such as loans to people who have now defaulted on their mortgages. Oops, indeed.

If the Fed and JP Morgan didn't step in, Bear Stearns would've had to declare bankruptcy and likely face liquidation in bankruptcy court by investors wanting back their money, and investors likely would've gotten back a fraction of what they invested in the first place.

[Blackhatjack]

3. By intervening in Bear Stearns and JP Morgan the Fed is giving a false impression of their value...

.... which will entire new investors and present investors not to pull out. That seems real close to 'pumping', and if it does not 'fix' the problem and Bear Stearns and others do 'fail' then that would be the equivalent of the coming 'dump.'

This is in no manner 'business as usual' by characterizing it as merely 'capitalizing... less liquid assets.'

[Selatius]

4. Pumping, in a practical sense, yeah, but not in a legal sense, but Bear could probably be sued.

The law operates on technicalities, for better or for worse. The Federal Reserve bank did not own shares of Bear Stearns, and as far as I know, neither did JP Morgan until they offered to buy all their stock today. Pumping and dumping was outlawed because people who did own shares of a particular company were abusing the market by intentionally misrepresenting the condition of that company in order to boost share price before dumping the stock on suckers who bought the propaganda.

If you can demonstrate that Bear Stearns itself misrepresented its financial condition prior to its collapse, you can sue Bear Stearns but no other bank either the Fed or JP Morgan. You can bet shareholders are pissed. If you can also demonstrate high ranking executives were dumping their stocks well ahead of the collapse, you might also have grounds for the SEC itself to come in and sue as well for insider trading.