What ever happened to creative destruction? It really is socialism for the big boys but cutthroat capitalism for the little people in this country. In my opinion, Bear Stearns, more than any other firm on Wall Street should be allowed to fail. No handouts, or bailouts from the Fed. If this were 1998, well, we all know what happened when Bear declined to aid in the bailout package of LTCM. So, that’s one reason. But the other is this: the more the Feds prolong a real shakeout the worse it will be when it finally comes.

Wow, it really is socialism, of the worst sort. From Barry at TBP:

If you are wondering WTF a non-recourse, back-to-back financing is, pull up a chair:

JPM gets to go the the Discount Window and borrow all the greenbacks they want; Then they loan that to Bear. In the event that Bear defaults, the NY Fed cannot go back to recover from JPM — hence, non-recourse.

The Fed is pissing away our taxpayer money on a company that in so many ways deserves to fail.

Update: Via Mish:

* Why do you reward a company with a failed model and poor results?
* Why do you bail out an over leveraged enterprise that is technically insolvent?

It certainly isn’t because they are too big to fail.

Update 2: Someone on a listserve I am on just asked a very trenchant question: “I wonder if Bear Stearns Exec’s will give up their bonuses?” The cost of the bailout by the Fed should be forced disgorgement of their bonuses.

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Sean Paul Kelley

Traveler of the (real) Silk Road, scholar and historian, photographer and writer - founder of The Agonist.

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  • What sort of arm twisting must have been necessary to get the bank to stand up for Bear Stearns? So what if JP Morgan can get all the funding it wants from the Fed to keep Bear Stearns going. The bank is now being dragged into this vortex.

    Remember too, there was no vortex as of yesterday. Bear Stearns denied having any liquidity problem, but suddenly within 24 hours they are at death’s door? The market is going to treat this very cynically because now the worst rumors are beginning to come true.

  • the Fed is in the process of setting up a facility to take every bad security(probably at par) as collateral for a repurchase agreement that it will let fail. Upon failure, it will simply take the security as collateral. It will do this over and over, and we shall have the equivalent of the Chinese Asset Management company which takes the bad loans off a bank’s books at par. The credit crisis will go away this way.

    So the taxpayers will pay for the entire credit crisis. It will not be a political football because all debts are equal, none is more equal than others.

    After the markets stabilize, the lawyers, who will have a shortage of M&A business, will join in the effort to prosecute the few unlucky ones whose fraud is particularly politically egregious.

    Thus, the soldiers of the street will get paid until another generation, Harvard schooled in high finance, can discern a new way to manufacture false wealth.

    This is the plan. We’ll see if it works.

  • Failure of Bear Stearns is incomprehensible. I can’t believe more is not being done, not that it should, but the insanity of Bear Stearns going under. What it tells me is that JP Morgan and the Fed are doing everything they can, and it is not very much compared to what is happening.

    Stearns has over $1 trillion of wealth under management, most of it level 3 off book. What is it worth REALLY. No one knows. It could be half. Stearns has a market cap of only $3 billion right now. It was $30 billion just seven months ago. But this entity could be $100 billion under water.

    Can’t be anything other than fraud. The tangled web of the big five brokerage houses can’t be unwound. I will say that if one goes, then they all go down. Everyone of these companies is suffering the exact same problem.

    We can start conceptualizing another reality that is likely to emerge.
    SHORTAGES and how to deal with it.

    1) Shortage of Diesel which is happening right now. How to transport stuff if there are sporadic diesel shortages.

    2) Shortages of gasoline. At least some point this year, there will be shortage. Already seeing talk in political circles of the need to reinstitute the 55 mph speed limit. Saves Diesel too. Ready for buying gas on the day your license plate says you can – odd even?

    3) Shortages of electricity. Think you can take electricity being 24/7 for granted. The coasts and south are in for load shedding this summer. electric grids going down for hours at a time during peak demand.

    4) Shortages of natural gas. How does that play out? Next winter. California is already gearing up to putting furnace controls in homes that are controlled by the utility with mandatory turn down of heat or mandatory turn off of airconditioners to maintain the capacity of electric and natural gas. Florida is looking at the same. Can you imagine that? Russia has done that for years.

    5) Shortages of water. This happens two ways. A shutdown of electricity results in a limit on water supplies, or drought emptying out the reservoirs. Lawn bans, and shutdown of water for commercial use and critical moments. Xeriscaping the golf courses.

    You folks ready for this, it is coming. The money is vanishing, it is supposed to do real things like keep the infrastructure from falling apart.

    Too late I am afraid.

  • how you can make something out of nothing. The consumer is broke, the country has a 9 trillion dollar deficit, and in spite of the falling dollar the trade deficit is growing as well. Broke is broke, right?

  • to try and rebuild their credibility. It’s kind of like the CIA in light of the WMD fiasco.

    “Is not our first thought to go on the road? The road is our source, our vault of treasures, our wealth. Only on the road does the ‘traveller’ feel like himself, at home.”
    Ryszard Kapuscinski

  • It acts like a hedge fund and has the leverage of a hedge fund – it just has many more moving parts. Some of them are healthy but some of them may not be, like asset management. Ultimately, though, it is that 30:1 leverage that is mowing it down. Every Wall Street firm is in the exact same situation. So are the large commercial banks, except that their leverage is about a third of the brokers. Unfortunately their loans are much more long term and therefore more prone to failure, so it probably evens out. What JP Morgan has is direct that brokers don’t have is access to the discount window, so they have now become the Fed’s SIV or conduit – the Fed is lending short term money to them while JPM takes take on overvalued long term assets from Bear Stearns and whoever else is next in line for failure.

    Notice that the Fed didn’t appoint Citibank as its SIV. I wonder why?

  • Bush Acknowledges Weakness in US Economy

    * AP foreign
    * , Friday March 14 2008


    Associated Press Writer

    NEW YORK (AP) – Trying to calm jitters about the economy, President Bush conceded on Friday that the country “obviously is going through a tough time” but expressed confidence about a rebound.

    In a speech to The Economic Club of New York, Bush said this was not the first time the economy has been rattled and that he is certain that it will ride out its troubles. “These are uncertain times,” he said.

    The president spoke as evidence of an ailing economy piled up. The dollar fell, oil and gold hit record highs, the economy is shedding jobs, retail sales saw a big drop and the effects of a severe credit squeeze linger. Economic worries have replaced the Iraq war as the No. 1 concern of voters in this presidential election year.

    Bush acknowledged that prices are up at the gas pump and grocery stores and housing values are down – leading to worries among everyday “hardworking Americans.” But he said low unemployment and strong productivity are proof of the economy’s fundamental strength and resilience.

    “Every time, this economy has bounced back better and stronger than before,” Bush said.

    The president also praised the work of the Federal Reserve. After cutting interest rates several times, the Fed said Friday it has voted to endorse an arrangement to bolster troubled Bear Stearns Cos. and stands ready to provide add liquidity to a combat a serious credit crisis.

    “It was strong action by the Fed and they did so because some financial institutions that borrowed money to buy securities in the housing industry must now repair their balance sheets before they can make further loans,” the president said.

    “Today’s events are fast moving, but the chairman of the Federal Reserve and the secretary of the treasury are on top of them and will take the appropriate steps to promote stability in our markets,” Bush assured his audience.


  • March 14, 2008
    Op-Ed Columnist
    Betting the Bank

    Four years ago, an academic economist named Ben Bernanke co-authored a technical paper that could have been titled “Things the Federal Reserve Might Try if It’s Desperate” — although that may not have been obvious from its actual title, “Monetary Policy Alternatives at the Zero Bound: An Empirical Investigation.”

    Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paper’s suggestions into effect. Unfortunately, however, the Bernanke Fed’s actions — even though they’re unprecedented in their scope — probably won’t be enough to halt the economy’s downward spiral.

    And if I’m right about that, there’s another implication: the ugly economics of the financial crisis will soon create some ugly politics, too.

    To understand what’s going on, you have to know a bit about how monetary policy usually operates.

    The Fed’s economic power rests on the fact that it’s the only institution with the right to add to the “monetary base”: pieces of green paper bearing portraits of dead presidents, plus deposits that private banks hold at the Fed and can convert into green paper at will.

    When the Fed is worried about the state of the economy, it basically responds by printing more of that green paper, and using it to buy bonds from banks. The banks then use the green paper to make more loans, which causes businesses and households to spend more, and the economy expands.

    This process can be almost magical in its effects: a committee in Washington gives some technical instructions to a trading desk in New York, and just like that, the economy creates millions of jobs.

    But sometimes the magic doesn’t work. And this is one of those times.


  • They’re just returning the favor….

    “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” ~ Charles Darwin

  • He’s about the worst person the White House could put forward to instill confidence in our government’s stewardship of the economy.

  • for economics? ROTFLMFAO

    “Is not our first thought to go on the road? The road is our source, our vault of treasures, our wealth. Only on the road does the ‘traveller’ feel like himself, at home.”
    Ryszard Kapuscinski

  • These guys didn’t create anything except bonuses for themselves while they worked to destroy the US economy by finding creative ways to shuffle paper. If, say, they had plotted to wreck the US currency reserves imitating Goldfinger by setting off a dirty bomb in Ft. Knox (which, come to think of it, would have done less damage to the economy), we’d have declared them terrorists and issued them orange suits and given them a vacation at Guantanamo Bay.

    Why shouldn’t these malefactors have their assets frozen as proceeds from terrorist activity?

  • JP Morgan seems to have been the prime player in margin calls on both Thornburg and Carlyle. Now they have a sweetheart deal with the Fed where they get to pick over Bear Stearns’s carcass at no or little cost to themselves if it comes to that. If everyone else is teetering in the house of cards, including the big banks, the ratings agencies, and the monolines, why does JP Morgan continue to introduce instability, or to be Johnny-on-the-Spot as Bear gets into trouble? Do they know something we don’t know? Think about it, by making the margin calls on Thornburg and Carlyle Capital, they’re forcing Thornburg and Carlyle to liquidate their assets, which devalues those assets, which also devalues similar assets held by competitors. Would they do this if they had similar assets? Did they just get lucky and get rid of their bad paper before everyone else, and now they’re kicking out the market support from under their competitors? Are they strapped for cash like most of the other big boys and making these plays to get while the getting’s good (or as good as it’s likely to be for the next two years, and possibly a decade?)

    One thing I know is that at the end of this–as at the end of every burst bubble–at least some people will have really cleaned house while everyone else smolders in the rubble. And this is usually due to foreknowledge arising from being one of the big boys, in the know, in the right place, and at the right time.

    I’m not advocating for JP Morgan, or saying that I like them or what they’re doing. I’m just saying that at least one of these bastards is going to get away from what’s going to happen, scot-free, and every time I turn around, something’s blown up and JP Morgan’s involved.

  • JP Morgan is by far the largest issuer of credit default swaps. They have a tremendous amount at stake if they have to pay out on these derivatives, and if their hedges don’t come through as expected. With Bear Stearns’ collapse, they’ve just lost one of their counterparties and will have to replace them somehow. The Fed no-recourse line of credit doesn’t solve this problem at all. JPM is a long way from being able to clean up in this crisis. I think they’ve just been dragged in deeper.

  • I didn’t know that. Very interesting. The CDS market may well just fold up on itself anyway no matter what anyone does. There are what, an estimated total of $540 Trillion in CDSs out there? That’s Trillion with a T. If . . . or it now seems likely when, that happens it would be like a supernova that completely wipes out everything.

    Who are these people pumping up the Dow? Do they realize that from the perspective of the rest of the world looking in, that due to the dollar collapse they’re just treading water on a good day?

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