By Justice Litle
What’s the surest way to tell between a black bear and a grizzly? Alaskan old-timers will tell you to climb a tree. If the bear comes up after you, it’s a black bear. If it simply knocks the tree down instead, it’s a grizzly.

The aftermath of the credit crunch now looks every inch a grizzly. (And the Fed is looking like Elmer Fudd with a pop gun.)

The highest-profile victim to date is Bear Stearns, an investment banking house with 85 years of history.

Bear Stearns has -- or rather, used to have -- more than 15,000 employees. The firm successfully weathered the Great Depression, World War II and countless ugly recessions. But it will not weather the credit crunch.

Roughly 14 months ago, Bear Stearns was trading at $170 per share. As recently as last week, it had a market cap in the billions. Now it is pretty much worth zero. (Wags at the Financial Times’ Alphaville blog have come up with anagrams rearranging the letters in Bear Stearns’ name. Two of the best are “Barren Seats” and “Absent Rears.”)

Over the weekend, JP Morgan agreed to buy Bear Stearns at the bargain basement price of $2 a share in common stock.

Hey, two bucks a share is better than nothing, right? Perhaps, but not by much. The Morgan deal values Bear Stearns’ assets at a paltry $236 million (as of Friday’s close). The firm’s Madison Avenue headquarters are easily worth more than that.

In a nutshell, JP Morgan is picking up a nice piece of Manhattan real estate at a discount. Bear’s building is the only thing of real value in this transaction. The business inside is worth about as much as the subprime sludge Bear loaded up on.

Bernanke as James Brown

Why did Jamie Dimon (CEO of JP Morgan) get such a great deal for Bear? Because Wall Street desperately needed a white knight. The prospect of letting Bear Stearns simply fail was too frightening to contemplate. That might have caused the “shadow banking system” -- the vital network of credit and counterparty transactions behind the scenes -- to seize up completely.

Such an event would have made the Long-Term Capital Management fiasco look like a tempest in a teacup. And so Fed head Bernanke had to do his best James Brown impression, begging Morgan to “please, please, please” buy Bear Stearns.

Even with the pleading from on high, Morgan was hesitant. And there were no other buyers in sight. (Sovereign wealth funds? Not today, friendo.) The attractive parts of Bear’s business couldn’t make up for its black hole of a balance sheet.

The way the deal went down, it looks like Dimon really didn’t want to do it at first blush. Bear’s black-hole balance sheet was just too scary. Who knew what further dangers lurked?

“No problemo,” said the Fed. “What if we cover your balance sheet risk? If you (JP Morgan) do your patriotic duty and buy this smoking wreck of a business, we’ll throw in $30 billion worth of government-backed protection. Maybe more if you need it. Nudge nudge, wink wink.

“And by the way, we’ll push through an emergency rate cut -- on a Sunday, no less -- just to seal the deal. And we’ll start lending money to brokers on the same terms as the banks… a historic shift! Oh, and we’ll even slash rates again later this week. What else could you want, a kitchen sink?”

In light of the stunningly favorable deal points, the question has to be asked: Who is really and truly buying Bear Stearns here? Is it JP Morgan… or is it the US government?

The government (by way of the Fed) is the one who moved heaven and earth to get this deal done, and the government is the one taking on Bear’s balance sheet risk. (JP Morgan has been aggressive in pointing this out.) This smells like nationalization one step removed.

Last week, Taipan Daily talked of “The Biggest Bailout in History.” In that piece we wrote that “the Fed’s ongoing rescue attempt … will go further and deeper than anyone can imagine.”

History moves fast, no? Here we are, already, at the blatant buyout stage.

It would have looked too obvious -- and too alarming -- for the Fed to write a check outright and stamp “Property of Uncle Sam” on a fallen pillar of private enterprise. So Ben Bernanke did the next best thing: He became a buyer one step removed.

The New Yucca Mountain

As a result of all this, the Federal Reserve has picked up a new nickname -- the “Yucca Mountain” of subprime.

For those unfamiliar, Yucca Mountain is a proposed dumping site for America’s nuclear waste. Most states are in favor except Nevada, where Yucca Mountain forlornly sits. Las Vegas is particularly less than thrilled at the prospect of a toxic tomb just 90 miles away.

Thanks to political opposition and technical problems, Yucca Mountain isn’t expected to open for business until the year 2021 (if even then). But the Federal Reserve version, as we have seen with Bear Stearns, is open for business right now. Subprime gunk has proven too toxic for Wall Street to handle, and there is just nowhere else to put the stuff.

As Wall Street’s books grow ever more radioactive in the minds of investors, the Fed will have no choice other than to continue its stealth nationalization program. The only way it can do that is by printing more dollars… throwing good money after bad until the madness finally stops.

Outrunning the Grizzly

Investors can draw lessons from another bearish tale.

Two hikers are tramping through the wilderness. Suddenly there is a rustling on the trail. The bushes part and a hungry bear appears.

The first hiker bends down to tighten up his shoelaces.

“What are you doing?” The second hiker asks. “We can’t outrun that thing.”

“I don’t have to outrun the bear,” the first hiker replies. “I just have to outrun you.”  Continued...