Is Bear Stearns Too Big to Fail?
Maybe it thought so, when it was taking on too many risky assets over the last few years, encouraged by previous episodes of inflationary policy. The Fed wants to give that impression too, to reassure investors--and middle class pension-holders especially--spooked by the prospect of a massive sell-off of assets, and what that would mean to the overall market.
But a correction is inevitable, and the Fed's action yesterday is the latest of several interventions in this still-short year meant to delay it, so that the political business cycle will work, and produce a correction sometime after November 4th. What I wonder is how much inflation will be endured in order to maintain these policies? Aren't falling asset prices part of the long-term solution? And why is Bear Stearns worth it?
Comments (23)
newson
q: "why is Bear Stearns worth it?"
a: to hide the shocking truth of the real value of its derivatives and synthetic securities. other banks could be discomforted by transparency.
Published: March 15, 2008 4:10 AM
jeffrey
The more of this kind of thing that takes place, the more you have to place strong blame on the monetarists and Friedman in particular for the one issue on which they are most wrong: the belief that the Fed's problem in 1930ff is the failure to bail out the system. Bernanke is only following this model.
Published: March 15, 2008 5:21 AM
Worth it? That depends.
Of course saving these financial conglomerates is worth it for the upkeep of the lie that is central banking. Central banking is the highpoint of the power base of government itself. Central banks can tax their citizens through inflation giving the rest of the government the power to perform the 3 towers of wealth destruction:
1. Interventionist Foreign Policy
2. Government provided services like education, health care and social security.
3. Intrusive law enforcement.
It was the terrorists that gave Bush and his buds an angry citizenry to enact his plans to destroy but it is the central bank that gives it the ability fund the disaster.
Published: March 15, 2008 9:44 AM
David
I think Newson was correct in the answer he gave to the question, "Why is Bear Stearns worth it?".
In Barron's this weekend you will note the concern over the credit derivatives counterparty risk that a Bear Stearns failure would expose. I guess they (the Fed and a large portion of Wall Street) want to keep Bear propped up and take everyone's mind off these risks.
Of course, as other have pointed out, these bailouts will only delay the inevitable shakeouts, while masking systemic problems and furthering moral hazard in the form of increased risk taking down the road. Why should anyone at the top care about the downside if the risks are socialized?
Jim Rogers has made this same point repeatedly in a number of interviews. Earlier this week, he appeared On CNBC and emphatically stated that the Fed was to blame for furthering moral hazard by bailing out investment banks and creating a kind of "socialism for the rich".
http://financetrends.blogspot.com/2008/03/features-of-week_14.html
And I believe he made those comments before the latest Bear Stearns bailout talks, at a time when their troubles were still in the rumor stage.
Published: March 15, 2008 6:54 PM
Stranger
Had the Fed not revoked its policy of subsidizing interest rates, Bear Sterns would still be in business. As the saying goes, so long as the music is playing, you've got to get up and dance.
What would happen if the government were to eliminate all ethanol subsidies overnight? The ethanol producers would collapse. They might be in their right to demand a bailout. It is not different for financial businesses.
Published: March 16, 2008 9:10 AM
Peter
The Fed is insane. Why not just give bailouts to everybody and their mother's cousin?
http://www.gopcatholics.blogspot.com
Published: March 16, 2008 1:51 PM
KPO'M
Well, now Bear Stearns has bit the dust, swallowed up by JP Morgan for $236 million. Now JP Morgan can mask the counterparty risk for a little while longer. What will happen now? My concern is that the Fed, by continuing to engineer bailouts, is setting us on a course that may not end until we have another depression.
Published: March 16, 2008 9:30 PM
pepe
I believe the answer to the question is: no
Published: March 16, 2008 10:23 PM
Dennis Lucey
Apparently Bear Stearns will be allowed to fail, or at least get swallowed up ignominiously by another firm. The fact that either (1) the Street misvalued this company by $50 billion on Wednesday or (2) BSC was subject to that much in margin calls over a two-day period may mean nothing more than that the firm was subject to a bear run, as if Spitzer-9 wasn't enough schaudenfreude for the Street, but I doubt it.
Published: March 16, 2008 11:29 PM
Koen
Peter Schiff on the coming dollar collapse:
http://www.youtube.com/watch?v=T1_Yo2BGdUk
Published: March 17, 2008 5:56 AM
newson
how long before lehman bros. goes the same way? late nights at the fed for a while!
Published: March 17, 2008 9:13 AM
Person
As I posted on Megan_McArdle's blog: Correct me if I'm misreading this, but it looks like JP Morgan gave shares valued at $236 million to buy out Bear, which held a portfolio valued at $33 billion, only $2 billion of which was subprime mortgages.
Seems too good to be true. So, I looked up Bear's balance sheet, which shows them with $395 billion in assets against $384 billion in liabilities, giving them a net book value of $10 billion, still a great deal for JP Morgan -- and quite a lesson in the importance of liquidity, since not meeting loans you have the assets to pay off means, in this case, being bought out for 11% of book value, or, as some people might say, "elevent cents on the dollar".
About the "too big to fail issue": would Congress or the Fed do something like this to save, say, General Motors? That's important in my car-making decisions because it looks like GM is headed for bankruptcy, meaning those needing warranty work will have to get in line behind pensioners. Yes, it's possible in theory to use one's capital assets effectively enough to yield sufficient revenue to cancel their legacy costs. However, in a bitter stroke of irony, if someone is smart enough to use the capital that way, you will have to pay them so much that they won't be able to do the job.
And btw, why did you dorkify the blog? The text is now way too small and everything's disorganized. I'll bet the preview function lies about why my post will look like, too.
Published: March 17, 2008 9:51 AM
eric lansing
Person,
I'm short JPMorgan and they are up 11% this morning.
I can't write what I feel because I don't want to go to prison.
Published: March 17, 2008 10:20 AM
TheSUBWAY.com
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Published: March 17, 2008 10:23 AM
josh m
Jeffrey-- "... and Friedman in particular for the one issue on which they are most wrong: the belief that the Fed's problem in 1930ff is the failure to bail out the system.
Did Friedman advocate Fed inflation to avoid that depression, and do you have an article or two expanding on this? I'm debating someone where they quoted Friedman's position as actually having been that the Fed stood in the way of allowing the money supply to expand in line with increasing gold supplies, and had the Fed just stayed out of the way, the downturn could have been avoided.
Published: March 17, 2008 2:19 PM
lester
stranger- the government shoudn't be subsidizing ethanol in the first place. why would i, the taxpayer, have to bail them out when I don't think they deserve squat in the first place
Published: March 17, 2008 4:56 PM
zaqk
Why did Bear Stearns failed?
can someone please tell me, explain,
please and thankyou,
Published: March 18, 2008 11:26 AM
zaqk
Why did Bear Stearns failed?
can someone please tell me, explain,
please and thankyou,
Published: March 18, 2008 11:27 AM
jason
Jeff, just look up what Bernake said to Freidman on his 90th birthday. He mentions it there I believe.
Published: March 18, 2008 3:48 PM
jason
That previous answer was meant for josh m
Published: March 18, 2008 3:49 PM
Chris
Is it even legal to do what they did?
http://financialpetition.org/petition-impeach.shtml
Published: March 23, 2008 10:19 PM
Henry Thornton
The Fed shouldn't have lent to Bear Stearns. But Friedman and Schwartz and the monetarists aren't to
blame. They distinguish between the banking or money-stock producing sector and the rest of the financial system. They insist that the Fed has no business trying to avert failure and crisis in the latter sector. The Fed's duty is to keep such failure from spreading to the banking system and endangering the money supply. The Fed's duty is to lend to solvent but temporarily illiquid banks who need extra reserves to satisfy depositors' demand to convert their deposits to cash. And that's all the Fed should do as lender of last resort.
Published: March 27, 2008 1:13 PM
Henry Thornton
The Fed shouldn't have lent to Bear Stearns. But Friedman and Schwartz and the monetarists aren't to
blame. They distinguish between the banking or money-stock producing sector and the rest of the financial system. They insist that the Fed has no business trying to avert failure and crisis in the latter sector. The Fed's duty is to keep such failure from spreading to the banking system and endangering the money supply. The Fed's duty is to lend to solvent but temporarily illiquid banks who need extra reserves to satisfy depositors' demand to convert their deposits to cash. And that's all the Fed should do as lender of last resort.
Published: March 27, 2008 1:13 PM