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Finally, Fortune magazine came up with a slew of articles, revealing the myth behind the recent moves from the Bernanke Fed regarding Bear Stearns bailout and providing in-depth analysis on this credit crunch.

The first article, “The last days of Bear Stearns”, provides a timetable of the Bear Stearns meltdown in great details: In March 7 afternoon, a major bank had rebuffed Bear’s request for a short-term $2 billion loan. On March 10, the firm had $17 billion in cash. The following day, another blow came from Goldman by stopping stepping in for institutions nervous on Bear derivatives deals via an email to its customers. With the email leaked the next day, the floodgates opened. March 13, CEO Schwartz contacted J.P. Morgan CEO Jamie Dimon in the evening with Bearn facing bankruptcy. At that moment, Bear only had $2 billion cash.

If what in the article is true, it provides two major evidences:

• The Fed didn’t hand-pick J.P Morgan for rescuing Bear Stearns.
• The Fed didn’t have the knowledge of the issue until March 13.

Here is the reason for the buyout as detailed in the article “On the brink of disaster”:

Bear had about $13 trillion of derivatives deals with counterparties, according to its most recent financial filings. If Bear had croaked, large parts of the world could have croaked. And the economic damage could have been catastrophic.

Well said, $13 trillion is too big to fail! The buyout is unavoidable. The article further points out:

Fedniks tell their friends – yes, many Fed folks have both social consciences and friends – that they’re furious about the Wall Street enablers of the mortgage mess and other financial excesses being able to escape the full cost of their folly, with the public picking up the cost.

If we check Bernanke’s track records, we can see that he keeps jinxing the market. While it is true that so far, the Bernanke Fed providing short-term money supply in the expense of taxpayers for the stability of the financial system, he, personally, tells the utter truth on the economy, which, in turn, hammering down the market, especially after the April Fool’s run-up. At this moment, the Fed has no choice. The Fed’s best hope is to let the stock market correct itself gracefully instead of a sudden 40% drop in a day or two, which definitely will crash the financial system as happened in previous financial crisis. Since Bernanke “made his academic bones writing about the Great Depression”, so far we are in good hands since we haven’t experienced market free fall yet.

However, the risk of having the second Great Depression is still likely since this crisis is very similar to the previous one:

Normally the economy goes bad first, creating financial problems. In this slowdown the markets are dragging down the economy – a crucial distinction, because markets are harder to fix than the economy.
……
When was the last time it happened in the U.S.? In 1929

The biggest issue is the high leverage of investment banks. We can find the numbers in the article, “What’s wrong with Wall St. – and how to fix it”

Since 2002, the five firms’ leverage, measured by assets as a multiple of equity, jumped from 30 to 41 (see chart on previous page).
……
half the huge gains in Wall Street’s profits from 2003 to mid-2007 could be attributed to increased leverage – otherwise known as gambling with borrowed money – that magnified earnings in a boom. Again, it’s the curse of too much debt: If a firm’s portfolio is leveraged at 33 to 1, it takes a mere drop of 3% to wipe out its entire capital.

To the end, the Fed has the sub-prime mess well contained. However, there are still enormous amount of ARM resets in the pipeline as this blog post tells us. We need to cross the finger, hoping that the Bernanke Fed won’t run out of ammunition before the end of this year.