Financial Sector Welfare

The Federal Reserve rescued financial icon Bear Stearns to the tune of $200 billion tax dollars Friday and JP Morgan Chase immediately swooped in to suck up the bank at $2/share.  Had the tax payers not injected the cash Friday Bear Stearns would have crashed due to a run on the bank.  We don't have money for health care or roads and bridges but we pump $200B into a bank without a second thought.

Of course the fed had to or the economy might have collapsed over the weekend.  This is a darned if you do darned if you don't scenario caused by a severe lack of regulation, oversight and enforcement.  Typical Republican economic mismanagement.  You can't trust the GOP with your tax dollars be it pork, wars of choice or allowing their corporate friends free rein.

The JP Morgan Chase takeover really stinks however because you subsidized this.  You got screwed by unscrupulous mortgage brokers and crooked appraisers, by hedge funds speculating on packaged mortgages and a few Congresses and a President who refused to regulate these markets.  Bear Stearns' stock dipped from $171 14 months ago to $2 today.  This bargain basement price invited a quick takeover due to a nice taxpayer bailout.

In the eighties we had a similar multi billion dollar taxpayer bailout of the financial industry.  Ronald Reagan and his friends deregulated the savings and loan industry and you paid dearly for that mess.  Neil Bush (the president's brother) and John McCain were two of the unscrupulous villains involved in that mess.  Now McCain is into financial hijinks again, trying to worm out of public financing for his campaign after using it to secure a multi million dollar loan and escaping about $4 million in ballot access fees.

Republicans had better stop screaming about funding programs for the poor when we're spending billions bailing out their friend's bad decisions.  Where, exactly, does their credo of personal responsibility begin and end?  Wall Street?

Comments

[Kirk Wentzel]

Well that's not exactly what happened there John.

Bear Sterns got into trouble and JP Morgan offered to buy them at a hugely dicounted price to take on the debt and prevent a collapse. In exchange the government and the Fed put up a $30 billion guaranteed for the bad mortgages and other assets under pressure.

Now I grant you that guarantee will be invoked for some of the bad mortgages but (with the safeguards in the guarantee) JPM will not be able to somehow draw the entire $30 billion. They have to take certain steps before the guarantee can be tapped.

You are correct that the taxpayers will bear some burden but who else would ever pay to fix the governments failure to regulate unsafe commercial paper and mortgages.

The failure of Bear Sterns, just like Northern Rock in the UK, would have gloral ramifications becasue of the interlinked nature of the financial markets.

Frankly if we could stop this freefall for $30 billion it would be a bargain. In the long run I think we'll find that the government's unwillingness to act and the Fed's haphazard approach to interest rate hikes and the fact that bond traders have apparently lost their minds and are doing the exact opposite of what needs to happen to resolve the mortgage problems, will have cost us much more.

Why am I not surprised! The GOP never has gotten the message that corporations, without regulation, will almost always take wild risks to make money for their shareholders and sometimes those risks fail dramatically. Only in hindsight do people stop and say "Oh gee perhaps we shouldn't have let them do that." Well no shit Sherlock!

[G Davis]

You make good points Kirk, but you forget to mention why wouldn't those corps take huge risks is they know ultimately they will get bailed out?

[John Morgan]

The $200 billion pumped into Bear Stearns Friday was tax money Kirk.

[EJ]

Obama in today's WSJ :

Sen. Barack Obama slammed the Bush administration for failing to respond aggressively to the economic crisis on Wall Street and for his administration’s cluelessness about the economic concerns of Americans.

That strikes a contrast with the statement that Sen. Hillary Clinton issued earlier today, when she didn’t mention the Bush administration, and instead underscored the steps she had taken to speak with top economic officials.

The fire sale of Bear Stearns to J.P. Morgan threw into sharp relief the economic crisis roiling Wall Street, even as both candidates had prepared to trade volleys over the war in Iraq as the U.S. marks the fifth anniversary of the Iraq invasion. And it illustrates the difficulty facing political candidates who feel pressure to promise immediate remedies for situations where intervention could prolong the economic pain.

Obama underscored the difficulty of addressing those nuances when he slammed the White House today for its prolonged inaction. “The President traveled to New York last week to say that there is a danger in doing too much and implied that doing nothing would be preferable,” he said in his statement today.

. . . the Illinois senator acknowledged the difficulty in drawing a line between intervention and allowing the market to correct itself. “My philosophy on this is that intervening in bubbles that burst is not always helpful and can just delay the pain,” he said. “On the other hand, I do think what you don’t want is a cascading decline.”

. . . Obama reiterated Monday afternoon his support for legislation introduced in the Senate last week to allow more homeowners to refinance their loans through the Federal Housing Administration, a New Deal-era agency established to allow first-time home buyers to achieve homeownership . . .

. . . Obama shied away from attacking the Fed, which he said was doing “its best to bring stability.” Instead, he reserved his attacks for the Bush administration: “History will not judge President Bush kindly for his failure to act,” he said.

[Kirk Wentzel]

Do you mean this John?

"Delivering a speech on the economy in New York, Bush voiced confidence in the Fed's actions to aggressively cut interest rates and the Fed announcement last week that it would supply up to $200 billion in loans to cash-strapped financial institutions."

Notice the 'S' on the end of the word institution. Notice the word "LOAN". This is a loan program announced several days before the Bear Stearns news even broke.

Lets not mix our apples and oranges here.

So far, only loans and guarantees have been offered.

"Last Tuesday (3/11/08), the central bank announced a $200 billion loan program that would allow the nation’s biggest banks to borrow Treasury securities and post mortgage-backed securities as collateral. The financing gave 20 top investment banks 28-day loans at what amounted to wholesale rates — at or slightly below the Fed’s benchmark rate on overnight loans between banks."

If this is what you are talking about, this is NOT tied directly to Bear Stearns, although as a top 20 bank Bear Stearns COULD have taken advantage of this program. Insteald JPMorgan is going to absorb them for a cheap price and $30 billion in guarantees.

Yes we'll pay something but to say that $200 billion went to Bear Stearns is simply not factually correct.

Wanna debate unions now. :)

[Kirk Wentzel]

You are right G Davis...corporations will, almost by nature, take unneccessary and foolhardy risks when they are integral to a global sector. Sometimes they do this knowing full well that the government will bail them out becasue they are integrated into a global sector that could not bear their loss without large-scale global ramifications.

Here is where government should be stepping in with some basic oversight and regulations. I'm not talking about nationalizing the banking industry but some basic oversight and safeguards may have prevented this mess and need not have been THAT intrusive to business. We have a central bank and the SEC for a reason. Sometimes a "hands-off" approach to business is NOT in the best interest of the shareholders, the corporations, the country or the global marketplace.

Thanks for you comments!!! :)

[Lee Levan]

Well said, Kirk. Well said.

[John Morgan]

From The Washington Post last Saturday:
"They weighed those fears against the fact that making the loan would put government money at risk. The New York Fed will accept collateral from Bear -- long-term investments viewed as safe -- in exchange for the short-term loan. In theory, that should protect the government against losses. But if the value of the collateral drops, the Fed could end up losing money.

And Fed officials worried about "moral hazard," the notion that other companies might behave irresponsibly if they think they too could get government help if they get into trouble.

The Fed's board of governors voted 4 to 0 in favor of the loan at its Constitution Avenue NW headquarters at about 9 a.m. (The fifth Fed governor, Frederic S. Mishkin, was traveling). "

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/14/AR2008031401617.html?wpisrc=newsletter

[Kirk Wentzel]

HI John...read the article your referenced...need to read the entire article:

"In the middle of the night, Bear and J.P. Morgan struck a deal. Bear would be willing to put up some of its assets as collateral in exchange for cash from the Fed. The transaction would be routed through J.P. Morgan, which, as a commercial bank, has access to the Fed's discount window. That would give Bear time to raise financing through the private sector.

"What this is is a bridge to more-permanent solutions," Bear Stearns chief executive Alan D. Schwartz said during a conference call yesterday afternoon.

But the deal still needed the Fed's approval. In a series of conference calls from about 3 till 7 a.m., leaders of the central bank discussed whether to exercise an authority granted the Fed in the 1930s -- and not used in four decades -- to approve the loan to Bear Stearns."

The very first sentence indicates this article is about a LOAN not an injection of $200 billion in taxpayer money to Bear Stearns. JCMorgan borrowed an unspecified amount from the Fed via the normal discount window process and lent in to Bear Streans in exchange for collateral interest in Bear's assets. So far this is a normal business process. Large dollars to be sure but still, just a loan.

As a result of the stock drop Morgan then choose to purchase Bear Stearns. Morgan can easily afford to do this having one of the most stable Balance Sheets of any bank in the world. They will absorb the debt and the assets and have asked the Fed for loan guarantees to help stem the tide of bad debt from Bear's shakey investments that they will be absorbing.

So far all I see are the words 'Loan', 'Loan guarantees, 'collateral'. This may be called a 'bailout' but nobody GAVE money to Bear Stearns or JC Morgan...there are collateral agreements on assets and that makes it a loan. The only people who lost here are the shareholders of Bear Stearns and had the bank gone under they would have suffered anyway. Such is the nature of investing, sometimes you lose your investment, that's the risk every investor takes.

Depending on how bad Bear's investments are (which we won't know for a little while) those loan guarantees MAY be exercised but Morgan has to jump through some hoops and take some steps before that happens. They can't just say "Hey, Fed....we're invoking the guarantee on this block of investments." They have to make several efforts to make those investments viable again before invoking the guarantee.

Fact remains, if Bear went belly up with no intervention, the market would have dropped drastically (600 to 1,000 points would probably be a good estimate) and that would have had global ramifications that would have cost American's a lot more than the cost of these loan and gurantees.

Granted it was ugly, I wish the Fed would not have had to take that step, I wish that the leaders of Bear were a little more conservative but Bear Streans has always run against the crowd and that strategy paid off for many years. Unfortunately the piper came calling and Bear could pay him.

And readers should not get me wrong here...I am NOT a big supported of the Federal Reserve. I think Greenspan was an idiot and I think Bernanke is traveling in the idiot's footsteps. But in this case I don't think they had a lot of choice.

I understand your original article John but I think we contribute to the problem if we mis-state what actually happened. The Fed made a loan and provided loan guarantees, they did not hand anybody 'free money'. If the Fed made an unwarranted risky loan that costs taxpayers $30 billion it will come home to roost and lend further credance to my assertion that the Fed is run by an idiot.

The idiot is going to drop rates again today (they should never have raised them to begin with). We'll see if it's 3/4 of a point or perhaps a full point (either are extremely rare events usually taken in times of crisis). No move will do a damn thing to help the credit crisis because mortgage rates aren't tied to interest rates...they are tied to the 10 year bond and various MBS (sorry...mortgage backed securities). Hey...remember I'm an accountant at a real estate firm so this stuff is my life. :)

OK now are we ready to debate unions? :)

[Joyful Alternative]

The repeal of Glass-Steagall in 1999 set the stage for all this mess. See http://www.prospect.org/cs/articles?article=the_bubble_economy. If only Bill Clinton hadn't been such a DLCer willing to accommodate the Republican banking libertarians like Phil Gramm!