Bear Stearns bail-out - what do you think?
Submitted by PAforClark on March 15, 2008 - 6:55am.
Economics | Economy
As a commercial bank, Bear Stearns was not eligible for the assistance it got from the Federal Government yesterday. Even though the rescue was manipulated so the money came directly from JP Morgan Chase, it was our tax dollars.
I'm torn (always on the fence!) - on one hand, I agree that letting one of these banks fail is probably going to cause a real panic. On the other hand, I don't want my tax dollars funding the risky behavior that is making people millionaires - they need to take their losses. Except for, in the end, it might be my 401K that ends up going with it.
It's a tough situation. What do you think?
"It was an old-fashioned bank run that forced Bear Stearns to turn to the government for salvation on Friday. The difference is that Bear Stearns is not a commercial bank, and is therefore not eligible for the protections those banks received 75 years ago when Franklin D. Roosevelt halted bank runs with government guarantees."
http://www.nytimes.com/2008/03/15/business/15regulate.html
UPDATE: Fast!
"Bear Stearns Cos. was closing in on a deal Sunday afternoon to sell itself to J.P. Morgan Chase & Co., as worries deepened that the financial crisis of confidence could spread if Bear failed to find a buyer by Monday morning.
People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading. "None of these things is done until they're done," Treasury Department spokeswoman Michele Davis said Sunday afternoon. "But I think everyone's expectation is sometime in the early evening hopefully" the deal will be done.
Terms of the deal were still being hammered out Sunday afternoon. Reflecting the dire situation at Bear, the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m. Last year, the shares hit $170."
http://online.wsj.com/article/SB120569598608739825.html?mod=googlenews_wsj
I'm in the same fence-sitting position on bailouts for homeowners.
"It takes two to speak the truth - one to speak and one to hear." - Henry David Thoreau
'The rescue of Bear is not permanent — the loans are for only a month — and there is an expectation that authorities will seek to arrange for Bear to be acquired, perhaps at a low price, or that it will be broken up and sold to more than one buyer.
Such an outcome could avoid systemic risk while leaving Bear’s top executives without jobs and perhaps deflecting criticism that they had not had to face the results of their mistakes. Bear stock fell 47 percent on Friday; all of the decline came after the rescue was announced.'
Furthermore, 'Overnight, the Federal Reserve and JPMorgan Chase arranged to provide the cash Bear Stearns needed. Bear could not borrow directly from the Fed because it is not a commercial bank.
The Fed had seen such problems coming, and had announced plans this week to lend money to major dealers in Treasury securities — like Bear — by taking in as collateral mortgage securities that are now hard to sell.'
So Fed holding 'bad' collateral, from sub-prime meltdown.
NYT article/Floyd Norris very interesting and useful, I think.
just infect otherwise good companies with Bear's toxic sub prime holdings? Those holdings are pretty much worthless so long as no one is buying and people are still going into foreclousure.
I don't see an easy way out this for anyone, I think the Federal Reserve and JP Morgan are aiming to slow down the train wreck by helping Bear to absorb some of the shock. They know they can't stop this thing, it is just too deep seated and too big a problem, I think Bear Stearns is just the tip of the ice berg and the worst is yet to come.
In the past they have been able to co-ordinate interest rate cuts with OPEC output hikes, but this time despite much begging from Bush, OPEC has not been willing to play ball. So cutting interest rates just devalues the dollar which drives up crude oil and gasoline and increase's the purchasing power of the Euro.
The Fed is pretty much powerless here I think.
The government (and others) believe that if they let this investment bank go, it would spread to all the others like in the depression. It was a run on the bank as they saw it, which is why those regulations were put in place for the other banks. Meanwhile, it's not a total save for this bank. It's going to have to be sold or broken up and sold and the money paid back, as I understand it. The people who did this will face losing their jobs. It's not quite the same thing as what the FDIC does for commercial banks.
Vive La France - the Road to Hyperinflation
Peter Schiff
Mar 14, 2008
This week, as the financial sector began to give way under the unbearable weight of bad mortgage debt, the Federal Reserve stepped in to save the day. At least that's what it says in the script.
In a surprise move, the Federal Reserve announced its intention to swap $200 billion of treasury debt for $200 billion of potentially worthless mortgage-backed securities. The Fed may have been partially spurred to take the step as a result of the rapid collapse of Carlyle Capital Corp. a publicly traded private equity firm that is a subsidiary of the Carlyle Group. The Dutch firm could not meet margin calls on its depreciating collateral of AAA-rated mortgaged-backed securities guaranteed by Fannie Mae and Freddie Mac. On Friday, the Fed then took the unusual step of providing emergency "non-recourse" funding to Bear Stearns, collateralized by that firm's similarly worthless mortgage debt. Apparently the Fed now stands willing to assume any mortgage-related risk that no other private entity would touch.
That the Fed would take such extreme measures, which would have been considered unthinkable even a few months ago, followed a few notable media events that may have affected their thinking. On Monday, Wall Street was rocked by an article in Barron's that suggested that government sponsored lenders Fannie Mae and Freddie Mac lacked sufficient capital to cover the likely losses on the $5 trillion in mortgages they insure (a position that I have taken for years) and raised the possibility of either bankruptcy or a government bailout. On CNBC the next day, Paul McCulley, the managing director at Pimco, the world's largest bond fund, publicly called for the Fed to use it balance sheet and its printing press to buy mortgages.
According to the Fed, its new plan does not amount to buying mortgages but simply accepting them as collateral for 28-day loans. However, will the Fed really return these ticking time bombs to their true owners in 28 days, inciting the very collapse its actions were originally designed to postpone? Why does the Fed believe that the mortgages will be marketable next month; or the month after that? Nor can we believe that such "loans" will be restricted to only $200 billion. Bear Stearns and Carlyle are certainly not alone in massive exposure to bad debt. Given the unprecedented leverage that many of the biggest financial firms used to play in this market, there will be many more failures to come. Does the Fed stand ready to bail out all comers? Based on this course of action, the Fed, or more precisely American citizens, will end up with trillions, not billions, of such securities on its books.
The problem with these mortgages (other than the borrowers lacking any means or desire to repay them) is that the underlying collateral is worth a fraction of the face amount. With recent foreclosure recovery rates amounting to less than 50 cents on the dollar, it is no wonder that no one wants them. The real estate bubble allowed borrowers to leverage themselves to the hilt using inflated home values as collateral. However, now that the bubble has burst, mortgage balances far exceed current property values. It is a trillion dollar time bomb that no one can possible defuse.
Paper dollars are technically Federal Reserve Notes, which means they are liabilities of the Fed. When it puts newly minted notes into circulation it does so by buying assets, usually U.S. treasuries, which it then holds on its balance sheet to offset that liability. By swapping treasuries for mortgages, the Fed effectively alters the compilation of its balance sheet and the backing of its notes.
However, backing paper money with mortgages is nothing new. The French tried it in the late 18th Century, and it lead to hyperinflation. Assignats, which were first issued in 1790 to help finance the French revolution, were backed by mortgages on confiscated church properties. Although the stolen underlying collateral did have some value, the revolutionaries saw no reason to limit how many Assignats were printed, which resulted in massive depreciation. Within three years, price controls were introduced and failure to accept Assignats, initially an offence subject to six years in prison, was made a capital crime. By 1799 the currency was completely worthless.
If even the threat of death could not prop up the Assignat, does anyone believe that the currency could have been saved if Robespierre had forcefully mouthed a "strong Assignat policy" as President Bush is now doing with the dollar? Rather than repeating the mistakes of history we should learn from them. Our own failed experiment with the Continental currency as well as the Great Depression should prove conclusively that it is Austrian, and not French, economics we should be following.
***
I would rather have tax dollars spent on mortgages than on war, but truthfully don't believe my tax dollars should be spent on either.
"It takes two to speak the truth - one to speak and one to hear." - Henry David Thoreau
It's starting to look bad - JP Morgan bought Bear Stearns for $2 a share this evening.
"It takes two to speak the truth - one to speak and one to hear." - Henry David Thoreau
I live in a townhouse. I noticed my city is looking for people who want to do communal farming this year. I guess they'll provide the land if people want to do the work and grow food. I know this is done in the urban areas around here, but this is a first for where I live. I hope they get plenty of takers and they donate their excess to food banks.
they were well received. I grew green beans, potatoes, and squash in the backyard. Most of my sun is in the front yard, so I may be doing some vegetables in the front instead of flowers this year.
"It takes two to speak the truth - one to speak and one to hear." - Henry David Thoreau
I have seen gardens in front of houses with edible plants. I think there's a red cabbage type of plant that looks nice. Whenever I plant herbs in the front of the house, the rabbits eat them. I grow herbs on the patio in pots. That works best for me. I have a limited green thumb.
living in so high up in the mountains, is being able to have a garden. Last year I tried planting some herbs in pots and even those had a hard time because it's so dry here in summer. I had to water them 2 times a day and it seemed a waste of water for what I was growing...
Once in a while you get shown the light, In the strangest of places if you look at it right.
I have a small built in planter box at the front door and last year I put sage, rosemary, thyme, chives, oregano and catnip in it. With the exception of the sage, all the plants have survived the winter -- I did nothing to protect them at all. It just never got all that cold for very long.
"It takes two to speak the truth - one to speak and one to hear." - Henry David Thoreau
used in front of houses.
LJM, I've just moved into a townhouse; waiting for some warmer days to plant somethings. Planning on herbs mostly, I think. Morning mostly sun, afternoon mostly shade.
...I moved our retirement $$ into money market accounts a few weeks ago when I saw the value of the original fund heading steadily down. One of our tenants is Edward Jones Investments, and their head honcho in that office tried to talk me out of that move. Well, we're earning practically nothing now, but we're not losing and I saved myself a further loss of several thousand $$.
I don't pretend to have any grasp on how the big economic picture works, so can't agree or disagree with the Feds move. I just want those who screwed up held accountable. Fat chance of that. Just look at the prior S&L scandal. One of those guys is running for President.
I "worry" for my kids (in their late 30s) as I watch all that their retirement funds had earned disappear. They are essentially starting over. At last they had the tax advantages.
like the right move; I am NOT expert or anything of sort on investments but this is what I have read ; it is 2am I am not going for the URL's but you can
economic downturn + projections + 2009
many people understand that the GOP is holding the economy together with scotch tape and they will take their fingers out of the economic dike just in time for the inaguration of a Dem-president
so the public can blame it all on the Dem; that is there form of GOP party building;
have you ever heard of the 'pendulum' cycle of politics/economics; most politicans believe that the pendulum
of culture and economy goes moves one side extreme to other side extreme; and they 'plan' taking turns in the executive branch presidency
based on the pendulum; http://mrzine.monthlyreview.org/wolff051105.html so they gentlemanly step aside for the other party in synch with the pendulum and when the prez election cycle is up the side scheduled to 'lose' the election is actually phoning the whole campaign in;
not really engaged or intending to win it;
The House of Lords are a bunch of gentle sweetheart for each other;
if this seems non-fiction to you because can't get 'testimony' on the record about it; the case can be made circumstantially as any observer/&/reader of decades and decades of american political history can draw such a conclusio;
it seems to be a tacit principle of beltway bubble corruption;
MCCain is running to win; but the lobbyist began to take up with Dem-Congresscritter clients BEFORE the primaries; there are now ( fact check my memory ) more lobbyists working for the left than the right; and the Dem- have been able to raise tons more money for campaigns end of last year and since than the GOP;
the GOP money is at all time low; so the 'smart' money has already bet on the outcome of the presidential race; Wall street has already begun to shift itself to adjust to the economics of a Dem-administrations anticipated financial policies;
do you remember what happened immediately upon inaguration of Bush; corporations slashed jobs and began their eight year rein to create recession ( one key to definition of recession is 'little or no job growth' )
Wall street had tacked their buy/sell strategies to the pendulum going in the GOP direction - no regulations and corruption business was going to get a free pass; the creation of the 'subprime loan' finacial instrument happeded immediately with the whells and widgets of BUshco administration mid-wifing its birth;
I have to look up Greg Palast motto for this phenom it aptly describes the concept;
But when the Bush regime took over, Countrywide and its banking brethren were told to party hearty – it was OK now to steer’m, fake’m, charge’m and take’m.
http://www.gregpalast.com/elliot-spitzer-gets-nailed/#more-1979
typos will go uncorrected... i am getting more zzzzzzzzzzzzzzzz
If impeachment is off the table so is democracy.
Bears Stearns stock lost about 50% yesterday and I believe has gone from 150 to 30 over the past year for an 80% loss. I would say that the investors are taking their losses.
I was actually looking at the stock pretty closely yesterday, but really don't have the cajones to put money into it right now (better bet is just to let this and similar companies drag the entire stock market down and then pick up some other "safer" stocks)
If one buys the argument that bail-out is inappropriate here, then the government should also be doing nothing to try to bail out homeowners either that made bad investment choices on their mortgages/real estate.