Paulson Defends Bear Stearns' Rescue ( Rescue? but they needed liquidation)

Forbes ^ | 03.16.08, 12:16 PM ET | Forbes.com Staff

[Ernest_at_the_Beach]

U.S. Treasury Secretary Henry Paulson did the rounds of America's Sunday morning TV shows to talk up the U.S. economy, promote confidence that financial markets would get through their present troubles and reassure a skeptical American public that the Bush administration was on top of the situation.

Speaking on ABC's "This Week," "Fox News Sunday" and "Late Edition" on CNN, Paulson defended the Federal Reserve's decision Friday to come to the rescue of Bear Stearns (nyse: BSC -

news - people ), the Wall Street investment bank most hurt by losses on trading in mortgage-related securities (See " Bear On The Bubble"). He said that in the risk to financial stability outweighed his concern about moral hazard.

[Ernest_at_the_Beach]

Related thread:

Fed Takes New Steps to Ease Crisis [Discount Rate Cut 1/4 Point]

[NormsRevenge]

moral hazard?

[Ernest_at_the_Beach]

Related thread:

Fed acts Sunday to prevent global bank run Monday ( Bear Stearns Taken over,...rates cut )

[the invisib1e hand]

moral hazard?

Yeah, as in, bailing out a company that doesn't deserve it.

[the invisib1e hand]

He said that in the risk to financial stability outweighed his concern about moral hazard.

This is a big statement. I don't know if I'm being overly dramatic, and I guess time may give a clue, but I think this is the sentence that caused the avalanche.

[Ernest_at_the_Beach]

This market was totally locked up....among other problems....:

Developments in the Auction Rate Preferred Securities Markets

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Wednesday February 20, 5:10 pm ET

DENVER--(BUSINESS WIRE)--Today, the Clough Global Allocation Fund (AMEX: GLV - News) announced that it has posted a commentary on recent developments in the auction rate preferred securities markets as it pertains to closed-end funds on its website at www.cloughglobal.com.

[NormsRevenge]

but but but..

Chrysler

Eastern Airlines

Savings&Loans

[Shady]

Ain’t gonna be pretty today in Lower Manhattan. Hold on.

[HeartlandOfAmerica]

The financial system, he said, was "more fragile than we would like right now."

THIS is talking the economy UP??? Vote of CONFIDENCE???

Where'd they get these dunces from anyways???

Sheesh.

[the invisib1e hand]

No, this is different. Apparently bear was double pledging its assets.

[the invisib1e hand]

the auction rate market has been locked up for weeks. there seems to be a capital shortage.

[the invisib1e hand]

Where'd they get these dunces from anyways???

Goldman Sachs, I think.

[NormsRevenge]

Thanks, that is a risky scheme.

[Ernest_at_the_Beach]

Tryiung to make some sense....More on AUCTION RATE PREFERRED SECURITIES (ARPS) – Securities issued by a ...

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They're coming out of the woodwork:
Investors who find our ARPs attractive.

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The problem with today's economy: It's not just one thing. Maybe we'll call it The First Cockroach Recession. As one problem gets solved, another emerges. When I kill one cockroach, days later another appears. Not getting the message? Read this piece from today's Economist:

If at first you don't succeed
The Fed tries to flush out the credit markets once again—but the stink lingers

Illustration by Satoshi Kambayashi

THIRD time lucky? The credit markets almost seized up in August, December and again this month and on each occasion the Federal Reserve has led a rescue attempt (see article). Its latest effort led to a bout of euphoria on Wall Street, with the S&P 500 index managing its biggest one-day increase in over five years on March 11th. But every time the Fed has unblocked the drains somewhere in the credit markets, they have bunged up elsewhere. Sure enough, on March 13th panicky investors sent the dollar tumbling below ¥100 and pushed gold above $1,000 an ounce.

The fear is that the financial markets have entered a negative spiral, the obverse of the kind of euphoria that drove dotcom stocks to absurd valuations in 1999 and early 2000. Back then, investors scrambled to buy shares regardless of their price. This time round, they are being forced to sell bonds and loans, whether or not they believe the borrowers will eventually repay. The problems are exacerbated by the demise of the securitisation market, and fears about counterparty risk. Both those factors are making banks less willing to lend—even to worthy borrowers. They will become ever more cautious the deeper America's economy tips into recession.

Debt, such an exalted financing tool a little more than a year ago, is now a four-letter word.

[Ernest_at_the_Beach]

Fed is printing more money....

[the invisib1e hand]

Thanks, that is a risky scheme.

Just remember, I said "apparently."

[HeartlandOfAmerica]

Wish they’d send him back then!

[ncalburt]

Bearns was heavily financially linked to the Carlye group

[Ernest_at_the_Beach]

I think I heard that Carlyle was leveraged like 22:1.....really exposed...I think they went Kaput...

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Google turned this up:

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Carlyle Group Doomed To Follow Enron: Is Hedge Fund Collapse Just Tip Of the 9/11 Put Options Scandal & 1700's Pirate Treasure?

Yes it did:

Opening Bell: The Great Hedge-Fund Unwind

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The hedge fund Carlyle Capital all but collapsed last night, stunning investors with the speed of its fall from being one of the biggest-name investment vehicles spawned by the late credit bubble to its latest victim.

Bloomberg reports the public company said late Wednesday it has defaulted on $16.6 billion in debt after its banks withdrew their money from the fund. Carlyle’s pleas to its lenders failed to prevent them from issuing margin calls (requirements to put up more collateral for investment loans) because of the plunging value of Carlyle’s investments, which spiraled uncontrollably until it wiped out all of the company’s cash.