In Bear Stearns deal, Fed foots hefty bill

NEW YORK (Reuters) - The Federal Reserve's $30 billion line of credit to help JPMorgan Chase & Co buy Bear Stearns Co Inc may ultimately end up costing taxpayers a lot of money if financial markets continue to suffer.

The Fed has agreed to secure a portfolio of some of Bear Stearns' most toxic securities, directly exposing the U.S. government to future losses, while bailing out Bear Stearns, one of the main players in the rocky market for structured finance.

Determining how big a loss the Fed may take on those securities is tricky, experts said. If Bear Stearns has already written down the securities enough, the Fed may not be taking much risk.

"At what level is the Fed taking it? Where is the stake in the ground being placed?" said Edward Crouch, head of global corporate & strategic development with SuperDerivatives in New York, an options-pricing firm.

But assuming that credit markets continue to be wobbly -- one index shows the cost of insuring investment-grade debt has risen by 143 percent so far this year -- the portfolio could be worth a lot less in a matter of days.

Who would pay for a loss like that? "Seemingly, it would be the taxpayer. There's no other way around it," Crouch said.

Whatever the impact to taxpayers, JPMorgan has likely secured enough financing from the Fed to protect itself from potential losses, analysts said.

"It's a possibility they have more bad assets, but when you get the most severely damaged collateral and cover yourself to the tune of $30 billion, that cushion goes a long way," said Bill Fitzpatrick, an analyst at Optique Capital, which owns shares of JPMorgan.

A hedge fund analyst noted that the $30 billion in Fed help essentially covers the $33 billion of assets that JPMorgan identified as "risk positions" at Bear Stearns in a presentation to investors on Sunday night.

The sovereign funds of other governments have suffered losses on their investments in U.S. financial assets. Citigroup Inc has raised more than $17 billion of capital since November from the funds, but the company's share price has fallen by one-third since the beginning of the year.

Singapore's roughly 9 percent stake in UBS AG is currently worth 58 percent less than it was when the city-state's wealth fund bought it.

In the case of Bear Stearns, the Fed is not just making an investment, it is trying to soothe credit markets increasingly ruled by fear.

"Without this Fed funding, the shareholders would have got nothing, and JPMorgan would have had to join the auction for Bear's better assets in bankruptcy," said Charles Dumas, an economist with Lombard Street Research in London.

"Another bust will drag (U.S. Treasury Secretary Hank Paulson) uncomfortably close to centre-stage in another such deal," Dumas wrote in a note.

(Additional reporting by Dan Wilchins; editing by Jeffrey Benkoe)