ALL BUSINESS: Fed's Big Gamble

That isn't an April Fool's joke. The chairman of the Federal Reserve thinks the Fed's $29 billion loan to facilitate the fire-sale of Bear Stearns isn't at risk because the collateral backing it has a high credit rating. He also said at a congressional hearing that the Fed's financial adviser is "reasonably confident" the central bank will get its money back on those mortgage-assets and may even profit.

Maybe it's time for him to call up some bank executives who've lost their jobs by counting on the same premise. The housing and credit crisis is proof that things which look safe may not be.

Bernanke's first comments on the central bank's mid-March move to save Bear Stearns from collapse came Wednesday and Thursday during back-to-back congressional hearings first the Joint Economic Committee, and then the Senate Banking Committee.

Bear Stearns was crippled when market rumors began to swirl about the size of its exposure to mortgage-related securities, and whether it had ample reserves to cover potential losses. That led clients and investors to demand their money back, causing a run on the bank.

Bernanke, citing "chaotic unwinding of positions," said the Fed had to step in to avert a Bear Stearns bankruptcy because the failure of the nation's fifth largest investment bank could have threatened the financial system. To stop that from happening, the Fed agreed to provide special financing that facilitated JPMorgan Chase & Co.'s buyout of Bear Stearns.

It's now known that the collateral on that $29 billion loan consists primarily of mortgage-backed securities assets considered garbage on Wall Street now due to the continued slump in the housing and mortgage markets. Those securities are difficult to sell and almost impossible to value.

Yet Bernanke doesn't seemed fazed by that. His spin is that the quality of the collateral is "investment grade, entirely current and performing."

Josh Rosner, managing director of research firm Graham Fisher & Co., calls it a "fallacy" for the Fed to find any comfort in high credit ratings. Rating agencies have been criticized for keeping high ratings on risky assets including subprime loans until the market was crashing.

Also, what's considered investment-grade which has a rating of triple-B or higher shouldn't be considered risk free. It can quickly turn to junk.