In The Long Run

The decision of JPM to pay up to $10 per share for Bear Stearns is being met with derision from all sides. Populists are claiming that taxpayer dollars are being used to "bailout" Bear Stearns. This is ridiculous. Tell BSC share holders who will receive $10 for stock which was trading at $80+ just weeks ago.

Others believe that it was unfair for the Fed to interfere and push JPM to pay up for BSC. Still others are miffed that BSC was not allowed to fail. Truthfully, I am usually in the third camp, but to do so would have caused massive panic over the health of the financial system It could have been the 1930s all over again. In the 1930s, financial institutions were permitted to fail and fail they did.

The Fed had to protect the financial system. It had to protect the financial system from irrational fears of irrational investors and fearful institutions. Irrational investors don't concern me as most individual investors are, shall we say, stupid. They buy tech stocks in spite of no earnings. They buy emerging market debt at lower yields than AA-rated corporate bonds. They buy low-coupon callable bonds and preferreds at discounts thinking they will be called (if I have to explain why this is stupid, you are a lost cause). They buy T-bills with yields around 1.00% and TIPs at negative yields.

When individual investors decline to invest in financial sector bonds I take it with a grain of salt. However, when institutions decline to loan money or trade with a firm, I become alarmed. Not necessarily because I think they have any insight into a potentially troubled firm, but because they may be concerned about the problems of others because they have the very problems they fear others have.

We are not done with the pain. Leveraged loans will be the blowup du jour in the coming weeks. Clear Channel promises to be the first and maybe biggest problem of the latest round. It is getting to the point that I almost want one of these big arrogant firms to blow up, but that would be cutting of my nose to spite my face. The saga continues.