Housing activists staged a demonstration in the lobby of the Bear Stearns building to protest the "bailout" of Bear Stearns, but are irate that there was no bailout of troubled homeowners. OK, let's set the record straight. Bear Stearns was not bailed out. It is gone, finis, kaput! It has failed and has ceased to be. It is an ex investment bank. Bear Stearns shareholders were wiped out. Two dollars or ten dollars it makes no difference. Shareholders were wiped out.
As I have said previously, I am no fan of bailouts and abhor moral hazards, but to let Bear go bankrupt would not have taught anyone a lesson and the Fed, Treasury or Congress would still be using taxpayer money, in this case to support a failing financial system. It was the bank failures of 1930 / 31 which which caused the Great Depression to be so deep and so long. The crash of 1929 merely started the ball rolling.
More writedowns are coming. More CDOs will be written down (especially if the monoline insurers cannot fulfill their obligations). Leveraged loans will haunt investment banks. If enough investors, lenders and counterparties become concerned enough to back away from another Wall Street Firm, we could see a replay of Bear. Who vould it be? Every investment bank is at least somewhat vulnerable. All it takes is some party panicking.
When will it all stop? When housing prices bottom, but that will not happen until home prices are permitted to seek their own levels. Bear Stearns shareholders lost almost their entire investment. Home owners are not nearly in as bad shape. After all, many troubled home owners never invested any money (no money down).
I write an Internal Use Only piece at my real job. However, a friend of mine, independently, has written about a subject on which I touched today. Please visit the following blog:
http://bondguy1824.blogspot.com/
2 comments:
I get your point about preventing disaster, but the Fed did bail out JP Morgan Chase by assuming the risk in $30 billion--strike that, $29 billion--in risky Bear assets. What would Morgan have been willing to pay without that provision?
BTW, I'm not clear whose money is at stake in backing those guarantees. It's Fed assets. Are those nominally private? Would we taxpayers make the Fed whole on any losses in this case, or would they just print money to cover it?
The Fed did not bail out JPM as the company did not need to buy Bear Stearns. If Bear never imploded, JPM probably would have gone after Bank of America's prime brokerage business. The Fed's money is ultimately tax payer money.
However, one must condider that, if Bear was permitted to fail and default on its obligations, we probably would have been dealing woith a few more failures and the financial system would have failed as it did in 1930 / 31.
The Fed doesn't print money, the treasury does. It is all taxpaye money which teh government prints when necessary, thereby devaluing the dollar and causing more inflation.
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