Posted on 04/09/2008 11:21:44 PM PDT by The_Republican
While conservatives inside the administration are unhappy about intervention in markets, President Bush seems content with how the Federal Reserve and Treasury cooked up the deal with erstwhile colleagues in Wall Street. There is little conservative or Republican about the administration's approach to the fiscal crisis, as reflected in Room G-50. Uncritical Democratic senators were not even inquisitive.
The closest a senator came to asking who set the price for JPMorgan was this apologetic question from Committee Chairman Christopher Dodd: "There's just reports -- I want to share them with you -- that JPMorgan Chase would make an offer of $4 a share. ... Did you or anyone in your agency provide feedback to JPMorgan or Bear Stearns on the value of that offer?"
Federal Reserve Chairman Ben Bernanke said there was no "interjection" by the Fed "to my knowledge." "There was a view," said Treasury Under Secretary Robert Steel, "that the price should not be very high." But Steel quickly added, "With regards to the specifics, the actual deal was negotiated" by the New York Federal Reserve Bank. Timothy Geithner, president of the New York Fed, then said: "Let me just echo what the chairman (Bernanke) and Bob Steel said" -- which was nothing. "We did not set or negotiate the price," Geithner said later. But who did? Senators did not demand to find out and did not inquire how JPMorgan was selected.
The Treasury's Steel, a Dodd constituent as a Greenwich, Conn., resident, is a political switch-hitter contributing to both parties. His Democratic recipients include John Edwards, Jon Corzine, Evan Bayh, Tom Strickland and Erskine Bowles. He was brought to Washington by his boss at Goldman Sachs, Henry Paulson, who was Rubin's colleague and successor as CEO there.
(Excerpt) Read more at realclearpolitics.com ...
Thanks to Novak for bringing this to our attention.
Even more sickening thing is that its MORON REPUBLICANS and George Bush who would be SOLELY blamed for this handout. They are 50% guilty and 75% Stupid and 100% treasonous to tax payers.
How many times do I have to scream Moral Hazard?
CEO's like Mozilo from countrywide and O'Neil from Merrill Lynch collected hundreds of millions in bonus and stock sale compensations based on the premise that the companies were making the profits to justify these rewards, but underneth, the companies could collapse at any moment. Not only could they collapse, these companies were the ones helping orchestrate the circumstances that caused the collapse. Where was the ethics? Where was the regulators? Where was the oversight by the federal banking authorities?
I don't buy the argument that I'm not a capitalist and believe in free market economies by making these points. Capitalism is doomed to fail without rule of law.
I know Mr. Novak, and he’s forgotten more than 50 of the leading so-called “journalists” in this country ever knew.
Right in front of everyone’s eyes......unbelieveable.
I met him once at a party, and it was interesting. I don’t always agree with his point of view, but there is no doubt that he is an outstanding journalist.
What “handout to Wall Street”? What price could be “placed” on a technically bankrupt BSC at that moment (due to its illiquidity and potential “run on the bank” on Monday)?
One could easily argue that $2 per share for what was essentially an institution with a negative tangible book value (i.e. a liability, instead of asset) and with insufficient liquidity to boot, was too much to pay - and if it was not, why did Bear Stearns agree to take-under?
This deal was not that much different, while much more visible due to scale, than recent deal by Bank of America caretaking of Countrywide Financial (largest mortgage originator in the country) - regulators and Congressional finance committee expressed their approval (not in public, of course) for that transaction or Countrywide would have to declare bankruptcy within days if not hours - and that could cause a chain reaction and would not be good for the mortgage industry and overall financial system. many said that BoA vastly overpaid, but they might get some “points” and help in the future from the Fed for taking a potential hit to save the system.
Bernanke engineered an elegant hand-off (not a handout) of illiquid assets in BSC portfolio to a liquid and solid market player and prevented a panic and potential failure of much larger target than BSC and the next link in the chain - Lehman Brothers.
BSC was already dead, its Chairman just did not know it even couple of days before it happened. They “do protest too much” now, and talk about some “Bear Stearns bailout” but the only thing that was done was preventing the panic unwinding and lockdown of $Billions in real assets in long legal bankruptcy proceedings.
Bob Novak may know politics but he should not write about matters financial like he knows what was going on.
If your claim is true then why didn’t the Fed just underwrite a “loan” directly to BS? No matter how you paint it, it was a good buddy bailout and just like EVERY other time, we taxpayers are gonna get it in the shorts.
The good ole boys in the boardrooms get to walk with lots of money and the small shareholders of BS are left with virtually nothing.
I am still suspect about the “expert” speculation about the Fed saving the world economy with their actions and besides, how many other times can the Fed afford to do this?
Now, that would be tantamount to bailout of Bear Stearns (one financial institution at a time) by Fed - instead of punishing, it would reward BSC executives and board for doing a lousy job of managing assets and not cause loss of billions of dollars by these people (like Jim Cayne, COB who lost about $600M in stock) and their friends (Cayne's personal friend British billionaire Joe Lewis who owned more than 8% of BSC and lost over $800M in a stock plunge) and all other investors. That's what would correctly be called a bailout of Wall Street institution at taxpayers expense. Instead, what BSC found out that it was not "too big to fail".
Is that the people you wanted Fed to "underwrite" loan to with taxpayers dollars? On top of that, that would only make matters worse because not only it would not stop, but it would guarantee the "run on the bank", not only in Bear Stearns but also what Fed was trying to prevent, other institutions (namely, Lehman Bros., a much larger institution, would be next). Besides, Bear Stearns at that point could not function as a BD (Broker / Dealer) due to "loss of confidence", which means that it would not have any cash flow from BD side of business and thus had no chance to orderly unwind the CDOs - and that means that Fed "loan" of taxpayers funds would then actually be lost - for all intents and purposes BSC was dead, a zombie with a lot of long term "L3 - uncertain value" assets and a lot of short term liabilities on its hands.
This was an orderly liquidation of failed financial institution that could take many others with them and tie up still more other institutions and smaller shops along the way. JPM was easy and safe to "underwrite". Some "good ole boys" lost a lot of "good ole money", some (including taxpayers, through Fed) might actually make money, given time, if there is enough good assets in portfolio to liquidate orderly, but most of BSC portfolio risk is on JPM's side.
BTW, to answer Messrs Dodd and Schumer and Novak, the "nominal" $2 price (which as soon as I learned of it, I understood to be "liquidation" of BSC, not a "bailout") was set / offered and approved unanimously by board of directors of Bear Stearns that weekend. These things are not done on a whim, and there are legal as well as financial consequences to the board, if it could not be justified. Jamie Dimon later offered a "sweetened" equivalent of about $10 to retain some personnel of Bear Stearns for transition and operations. Jim Cayne sold his remaining stock at about that $10+ level.
Next time anybody says the word "bailout" - ask them who was "bailed out", and then watch them stammer trying to explain.
I thin it’s more that it would be too much work, and too difficult intelligence-wise, for Dodd and Schumer to try to wrap their mind around this issue. So they hem and haw without effect.
Simple: Bear was not bailed out. It's counterparties were.
Exactly. Out of about 30 billion bad loans, JP Morgan is taking on 1 Billion worth, and Feds are guranteeing the rest.
That’s the idea. Counterparties is/was the entire financial system (millions of people who had nothing to do with or even had to know about Bear Stearns), just like a counterparty to a snowball is an avalanche.
the Bear Stearns deal was *not* a bailout of Bear Stearns, it was a bailout of J P Morgan
as time passes, this becomes clearer and clearer. If you doubt it, check how exposed JPM was to Bear Stearns toxic paper which would have been marked to market instantly if BSC had actually declared BK
you presuppose that a “bailout of the entire financial system” is what this was (debatable), and you imply it is a good thing (also debatable). When the next over-extended investment bank fails, will it again be a good thing for the Fed to step in and guarantee loans (they are buying CLO’s now, you may have heard) and mortgage bonds of questionable provenance but certain (yuck) quality? The fed is on a very slippery slope now. at some point, they will have to say “no.”
That's exactly what Bernanke (a noted expert on Great Depression) is trying to stave off. By taking these (CFC and BSC) actions early, they hope that they won't have to do much more. BSC was dead, it was only a question of how many institutions and innocent people seemingly totally unrelated to them (through illiquid derivatives) they would take with them and for how long - in case of BK.
BTW, it's not unprecedented. If you remember LTCM crisis in 1998 with about $1 Trillion in derivatives, it was similarly "bailed out" (in reality, orderly liquidated, but the same moniker was bandied about them, too) by NY Fed and other WS banks (with GS in the lead)... Interestingly enough, Jim Cayne of Bear Stearns was the only one of major financial institutions' heads who refused to participate in LTCM "bailout".
I am not saying that it was a "good thing", I am saying that it was a "necessary thing" (just like LTCM) and it was handled fast and expertly and that not only it might work, it may actually work to the benefit of the taxpayers. Obviously there were winners and losers, like in any other [significant] market event, but individual investors and institutions did not explicitly get "bailed out", they took it in the shorts.
That's why there is so little "curiosity" on the Hill about particulars of this, from Republicans and Democrats. And except for the word "bailout" repeatedly and improperly applied to Bear Stearns (I hope that is not debatable) in Novak's article and everywhere else (usually for political purposes or out of laziness), I don't see what other significance or "conspiracy" that article implies except saying that "This was no such emergency.". Sorry, Mr Novak, it was an emergency, and that fact is not debatable!
I already mentioned in prior post who "set" the price (Bear Stearns Board of Directors themselves) of liquidation - it is public knowledge, thus "lack of curiosity" on the subject, so Novak simply did not do his homework (" "We did not set or negotiate the price," Geithner said later. But who did? Senators did not demand to find out...")
Novak's job is to write an interesting and juicy political column - that he did, but there is no reason to make it into anything more than it was.
Bear's pass on the LTCM is utterly irrelevant.
And, oh, unless you're counting in helicopter ben inflatodollars, you'd better check your math. maybe move the decimal place one space to the left and you're getting closer. Oh, and LTCM wasn't about derivatives. it was about bonds. There's a big difference. Shall I explain it to you?
math errors aside, this is wholly different. the fed had no stake in that bailout, now they do.
There are two possible conclusions to be drawn from the Bear bailout: 1)If the "financial system" is so fragile that the failure of a 2nd (3rd?) tier player jeopardizes global stability, i'd better get some more ammo and bottled water.
or 2) If this was (only four) fed governors protecting their owners from having to mark their books to the market, then it is crooked.
It's quite discouraging to hear all the "conservatives" on this site cheerleading a *government* bailout or whatever you want to call it. Free market conservatives should cheer market clearing, not big guv or central bank intervention (manipulation).
If you doubt it, check how exposed JPM was to Bear Stearns toxic paper which would have been marked to market instantly if BSC had actually declared BK
To an extent, yes! But everybody has everybody's "toxic paper" - that was the initial idea behind CDOs / CMBS and derivatives "by any other name" - these bundles of derivatives were packaged and resold in different shapes, forms and sizes between financial institutions and to regular non-financial companies and to commercial and individual investors, large and small - all chasing higher yield.
The idea was to "spread the risk" or "manage the risk" to any individual institution by involving smaller parts to larger number of participants. Like any interesting idea it grew in size with the market and overwhelmed it where nobody knew what they had on their hands. It was good while the going was good. The way it worked out when things started to go bad, is that everybody had everybody else's toxic paper, and it could become an avalanche or chain reaction of tremendous proportions when someone of significant size has to quickly get liquid and starts unwinding the derivatives - it affects everybody, and propagates through the entire financial system, and none would be unscathed when prices plummet with no one willing to be a buyer - and it results in collapse of financial system. Foreign financial entities and banks were involved as well. Not exact correlation and example but when France's Societe Generale had to unwind their "rogue trader" Kerviel's position, there was a huge spike down in the world markets, and that position was relatively small. Brits in January gave Bank of England and FSA power and authority to take over failed banks in case of emergency and danger to the system.
Some had more of the "toxic paper", some had less, some had more of particular Bear Stearns paper, but everybody was to larger or lesser degree exposed, and problems of one institution at any given moment would become a problem for another one just a bit later. JPM was the logical choice for this, it's stable, liquid and wants to take a reasonable risk to expand. Jamie Dimon is probably giving Sandy Weill nightmares for kicking him out of Citi years ago. Now JPM is bigger than Citi and in better financial form. Just this week Dimon offered to purchase WaMu for about $9 a share ($8 Billion market cap), but they decided to go with TPG's preferred convertible in the interim. I think it could end up like Countrywide / BoA eventually, because it started very similarly, but I could be wrong.
Very good observation on "mark to market", but that's exactly why this is an interesting issue now, with so many businesses and non-financial companies having these types of (higher-yielding) paper, but who don't need the liquidity now and intend to hold these to maturity, of how to qualify them on the balance sheet ("mark to market" or at "face" or "discount" value). It's a bit obscure for most WS and financial/FASB outsiders (try getting their heads around FAS-140, for example), but it's a very important issue that could affect the market and stock value of many companies.
In that sense, all of these companies (i.e. altogether, our "financial system") are getting "bailed out" by efficient liquidation of Bear Stearns, but then, essentially so are we.
Nobody is bailing out [relatively] small banks and mortgage originators and they have been failing by the dozens in the last year, but they do not and did not present a danger to the system. BK by BSC would be a huge, long lasting mess. Fed and others handled it just in time and eventually, pretty transparently. Strong and liquid funds and financial institutions will become stronger and richer in time by picking up the pieces, but not without risk.
John Meriwether...Fool Me Twice?
You want to nitpick my LTCM numbers, fine, there were many of them going around at the time. The story is the same here as it was then - financial companies that are leveraged the most do best in "good times" and collapse fast in "bad times". BSC was not only more leveraged than most, but also its profits from BD business were going away due to "lack of confidence", so it would not survive a "run on the bank" on Monday and was going BK in short order, with all the described consequences or else its BOD would not have agreed to a "bailout" of $2 per share, down from $57 only two days earlier.
The rest I already covered, including what BK of BSC would do to the overall financial system and who or what did or did not get "bailed out", so we'll just have to disagree on the role of the Federal reserve as "lender of last resort" in this case. It has nothing to do with "free market", but it has to do with the "maintaining orderly market". If anything, IMO, these timely Fed actions will help us maintain the free market system, not endanger it with heavy-handed government controls which would surely follow in the aftermath of BSC collapse and market mess, which would affect all of us and make us only weaker for a long time.
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