fed bails out bear stearns

I’m usually too intimidated to write about U.S. monetary policy. As I don’t have much of a background, I’m hesitant to venture out and say anything when Fed Reserve Chairman Ben Bernanke does something like lower interest rates. Even if I suspect that something might be amiss, I keep my mouth shut. Occasionally, however, something so fucked up happens that even I know it’s not right. And that’s what happened yesterday when the Fed Reserve agreed to bail out Bear Sterns, a private firm responsible for much of the sub-prime credit crisis now rocking U.S. markets. So, as hundred of thousands of American families are losing their homes to foreclosure, our federal government has decided not to help them, but to help the greedy, irresponsible multi-millionaires who brought this crisis on us…. Here’s a how the “New York Times” article on it begins:

What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year?

Or all of the above?

Stick around, because we’ll soon find out. And it’s not going to be pretty.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide…

Republicans are always talking about accountability… Well, where’s the accountability here? Instead of a bail out, why aren’t we talking about prison terms? Perhaps if we’d cracked down after the Savings and Loan scandal 20 years ago, we wouldn’t be here right now. But, instead, we bailed out Neil Bush and his buddies. I can understand the need keep markets functioning, but there has to be some middle ground where this kind of behavior isn’t encouraged. As it is, these folks have everything to gain and nothing to lose.

update: As always, our friend Jim Kunstler has an opinion. Here’s a cip:

…Now, apparently, we’ll also opt for a bail-out of all those who tried to become rich by getting something for nothing at both ends of the Ponzi scheme called the housing bubble — the “little guys” who signed mortgage contracts they could never hope to pay off, and the Wall Street playerz who bundled these hopeless contracts into fraudulent securities (and their enablers in the ratings agencies, plus the hedge fund smoothies who tried to cash in by using recondite algorithms to dissolve the risk associated with imprudent lending.) The bail-out is likely to accomplish nothing except the more rapid bankruptcy of government at all levels and a second Great Depression at ground level (worse than the first one).

Over the weekend, the Federal Reserve engineered a $30-billion dollar Saint Paddy’s day present for the JP Morgan bank by handing them the corpse of Bear Stearns. The object of the game is to prevent the “assets” of Bear Stearns from going to the auction block, on which they would be discovered to be nearly worthless, which would instantly render all similar assets held by the other big banks to be similarly worthless, and would result in a universal margin call that would pretty much unwind the hallucinated “wealth” acquired the past ten years.

Despite the heroics around the fate of Bear Stearns, it looks like the financial system is tottering anyway. Perhaps the last trick left in the rescue bag will be the 100-basis-point drop in the Fed rate rumored to be announced tomorrow. It won’t help any of the big banks, since their problem is holding liabilities in excess of assets. Almost certainly it would crater the US Dollar.

The next thing in store for America, in my opinion, will be a rather new surprise: oil-and-gasoline shortages. While frightened money pours into the oil futures markets, driving the price up, strange behavior will start brewing in the actual physical allocation process. Imports of oil and gas to the US may not be as reliable as it had been when America seemed to be a solvent nation. The exporters may be changing their terms of doing business with us — and that’s nearly two-thirds of all the oil we need. The public would probably suck up oil price increases indefinitely, but shortages are going to be something else. A real freak out.

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13 Comments

  1. Brandt Coultas
    Posted March 16, 2008 at 10:56 pm | Permalink

    JP Morgan just bought Bear Stearns for $2 a share, or $236 million ($2 x # of shares outstanding) for the entire firm, http://biz.yahoo.com/ap/080316/jpmorgan_bear_stearns.html.
    That is, quite literally, a penny on the dollar (or 1%) of what Bear Stearns was worth two weeks ago in the market. So I don’t know if anybody is going to get rich on the deal(the Bear Stearns shareholders certainly are not, they just lost everything. That includes Bear Stearns employees who reportedly were locked into their Bear Stearn stockholdings). We the people are still on the hook though. The Fed is guaranteeing $30 billion of Bear Stearn’s assets (in other words, JP Morgan gets the bailout on the remaining IOU’s should things remain rocky).

  2. egpenet
    Posted March 16, 2008 at 11:05 pm | Permalink

    In ADDITION to the 28-day float granted through JP Morgan-Chase to Bear Stearns …

    JP Morgan Chase is going to be bought out by Chase for a stock swap amounting to $2 a share for Bear’s common.

    Last March, Bear (BSC) was nearly $160/share.

    Granted, Bear is not your local bank, but now Chase … MY local bank … is going to be holding all of Bear’s bad paper … and some good stuff, too.

    I would change banks, but where does one go in this economy? If the biggest and baddest commercial bank in the country is soiled, what is National City, LaSalle, Bank of America, Citi, Comerica, Wells Fargo, Wachovia … Ann Arbor Bank, for that matter … where’s the bottom?

    Our president chuckles and smirks that “these are interesting times.” He is a complete fool. And of the three competitors left standing for the oval office … not ONE of them has the background or the smarts to become the FDR we will need in nine months.

    Speaking of smarts and experience, not ONE of the FED Board members has ANY experience buying or selling on the street. They are theorists, educators and bureaucrats. They have made one mistake after another and are pushing on a string at the moment.

    God help us all!

  3. Posted March 16, 2008 at 11:29 pm | Permalink

    From my understanding, the Fed’s primary goal right now is increasing the amount of money that can be borrowed. The money supply in the financial sector is very tight and without improved liquidity the economy will suffer. Another major concern for them is limiting the number of foreclosures.

    Although it may be more cathartic to lock-up people who gave out bad credit to make a higher profit (which it actually didn’t), I think the more important action to take is creating government regulations on the industry to prevent future issues.

  4. egpenet
    Posted March 16, 2008 at 11:39 pm | Permalink

    Either way … the FED has two choices:

    A) Bailing out cash-starved institutions … and lowering interest rates increases debt, lowers the value of the dollar and increases inflation. (Your house value goes down another 10-20%, gasoline goes to $5/gallon and Ypsilanti’s Bond interest payments go through the roof … for example.)

    B) Doing nothing … creating panic in the markets and possibly starving the financial markets, and possibly stimulating more bank runs. (Your hose value goes down another 10-20%, gasoline goes to $5/gallon and Ypsilanti’s Bond interest payments go through the roof … for example.)

    You decide.

  5. egpenet
    Posted March 16, 2008 at 11:40 pm | Permalink

    hose values … hee,hee … laugh or cry

  6. egpenet
    Posted March 16, 2008 at 11:47 pm | Permalink

    Question …

    I missed the gap down on Friday, but shorted BSC down the rest of the day.

    Will the exchange halt trading Monday at the open? Or will they let me ride it to $2?

    My guess is they’ll halt trading and I probably should cover in the pre-market … if they’ll let me. This part of the game is fixed, too.

  7. Meta
    Posted March 17, 2008 at 10:30 am | Permalink

    http://www.afp.com/english/news/stories/newsmlmmd.4a38b973ddbf7ed599c6cd151b8c8a7e.211.html

    TOKYO (AFP) – World markets suffered fresh turmoil Monday as investors dumped both stocks and the dollar on fears more US banks could be vulnerable to the credit crisis that crippled Bear Stearns, dealers said.

    They said an emergency cut by the US Federal Reserve to its discount rate and a weekend deal for JPMorgan Chase to buy Bear Stearns at a fire-sale price had added to a sense of crisis sweeping through global financial markets.

    The volatility spilled over into commodities Monday as oil prices soared to fresh highs and gold prices jumped as investors looked to safe-havens…

  8. Steve H
    Posted March 17, 2008 at 12:09 pm | Permalink

    I also found this column at the Huffington Post interesting.

    http://www.huffingtonpost.com/hale-stewart/on-the-bear-stearns-situa_b_91842.html

    Part of me hopes that Kunstler’s right. Is that evil?

  9. Paw
    Posted March 17, 2008 at 12:16 pm | Permalink

    Maybe not evil, but certainly un-American.

  10. Sloth
    Posted March 17, 2008 at 2:04 pm | Permalink

    And this from Think Progress is worth considering.

    PROGRESSIVE SOLUTIONS: Reacting to the Fed’s announcement, President Clinton’s former Treasury Secretary Lawrence Summers said “emergency provision of loans is necessary but not sufficient.” The current economic situation needs progressive solutions. Andrew Jakabovics, CAP’s Associate Director of the Economic Mobility Program, recently noted that “too many U.S. homeowners facing foreclosure and too many of their neighbors potentially lining up behind them.” CAP’s Great American Dream Neighborhood Stabilization, or GARDNS proposal “would provide $4 billion to buy up real-estate owned by banks and put deserving families in those homes” which would “cope with the foreclosure crisis and all its cascading ramifications for world financial markets and the U.S. economy.” Addressing the other root cause of the nation’s poor economy — the credit crisis — another CAP plan calls for a a credit card safety rating system to “give consumers better information about their credit cards and thus help them make better decisions.” As more Americans struggle with paying for their everyday expenses in the midst of an economic downturn, such a system would lead to a better understanding about the ways the access credit. This would not preclude Congress from mandating “a higher level of fairness in credit card terms.”

  11. MIke
    Posted March 18, 2008 at 12:05 pm | Permalink

    egpenet,

    Try a credit union. Local is nice, but I found that Bank of Ann Arbor engages in many of the deceptive, anti-consumer policies of the large banks. It’s one thing when a big national bank is destroying the lives of the poor, but a local bank doing it in it’s own community seems a lot worse to me.

    Part of why this is so confusing is that most people don’t really understand what money is, a representation of debt rather than of wealth. If you google “money as debt” there’s a cartoon explaining what money really is. Also, the Ludwig von Mises has tons of lectures by Murray Rothbard, and he explains very well how market forces should act to control these problems, if they were allowed to work.

  12. MIke
    Posted March 18, 2008 at 12:10 pm | Permalink

    Oh, and the problem with the republicans isn’t that they push free markets with all their failings, it’s that they give us this shit and call it a free market.

  13. egpenet
    Posted March 18, 2008 at 12:15 pm | Permalink

    I’ve been reading all those sensible “Austrians” for years … Stenholz, too, and Freidman, and others.

    I wish the credit union was downtown. I’ll add that to my list of desireable downtown businesses.

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