White knights

by John Quiggin on March 17, 2008

It’s just been announced that JP Morgan will buy Bear Stearns for $2 a share, implying a value of about $250 million. Given that the company headquarters is said to be worth about $1.2 billion, that gives the BS banking business a value of negative $1 billion. And that’s only after the Fed agreed to take on $30 billion worth of toxic waste from the BS portfolio, politely described as “less-liquid assets.”

Clearly, under any normal circumstances, a company like this would have been left to go bankrupt. The problem is that this would jam up the entire credit market because BS is a counterparty in a vast range of transactions with other banks. (We debated this issue a month ago with a number of commentators arguing that the problem of counterparty risk was not such a big deal).

Some light relief is provided by the announcement by Standard & Poors, the day before Bear imploded, that the worst was over. This will go down with Irving Fisher’s comment in late 1929, that the stock market had reached “what looks like a permanently high plateau”. But at least Fisher wasn’t being paid to judge the stock market. Surely it’s now time to kill off the quasi-official role of the ratings agencies, as Justin Fox has just argued in Time

Looking ahead, the limits of the white knight strategy employed in this case must be approaching. JPM will take a while digesting this mess, and Bank of America has already done its bit when it agreed to rescue Countrywide. The other big banks have their own problems. Any future maidens in distress will have to look directly to Uncle Sam for a rescue.

Update Readers used to the natural order of things might be concerned by the implication that with such a giveaway price, the top brass at BS might be forced to bear the financial consequences of events that were obviously beyond their control. Never fear. According to this Reuters report in the Guardian, while most employees up to junior executive levels will lose both their jobs and the shares they were encouraged to buy, with no “golden parachutes:

JPMorgan Chief Financial Officer Mike Cavanagh late Sunday said taking over Bear would generate about $6 billion in merger-related costs.
JPMorgan has not broken down those figures, but much of that will be earmarked for severance pay and potential exit packages for top executives like Schwartz.
A person familiar with the transaction told Reuters that roughly $1 billion of those costs would be earmarked for severance and retention.

{ 58 comments }

1

Randy Paul 03.17.08 at 12:35 am

Any future maidens in distress will have to look directly to Uncle Sam for a rescue.

That is the scariest sentence in your post, especially given who’s in the White House. This could have the potential to make the S & L bailout of the 1980′s see like the proverbial walk in the park.

2

PHB 03.17.08 at 12:57 am

Well of course the plutocrats go running for a bailout when there is a problem. They always have and they probably always will. They invented government as a means of bilking the poor and are determined to keep it running that way.

3

christian h. 03.17.08 at 1:51 am

What phb said. It’s the reverse trickle-down theory: if the rich go under, it’ll have repercussions. We can’t have that! They’re too big to fail.

If the state really thinks they have to bail out investment banks and the like, at least go the Northern Rock way and nationalize the damn things.

4

Walt 03.17.08 at 2:04 am

They really do have to bail out these banks. Otherwise, we really would have the Great Depression II on our hands. (Though arguably, they should just nationalize them, as Christian suggests.)

5

christian h. 03.17.08 at 2:08 am

So maybe the banks have to be saved – there’s a point to that (though Bear Stearns is not, strictly speaking, a bank). So how about having a windfall tax on the bonuses of the investment bankers and hedge fund managers? It’s quite grating to see them walk away with the loot while the worker’s taxes pay to prop up the house of cards they constructed.

6

christian h. 03.17.08 at 2:12 am

(Sorry for the dangling modifier. “they” being the investment bankers and hedge fund managers, of course. Not the workers. Or the banks.)

7

Randy Paul 03.17.08 at 3:10 am

What Christian H. said: all three posts.

What makes me angry is the lack of consequences for those whose irresponsibility created this crisis.

8

c.l. ball 03.17.08 at 3:20 am

Bear Stearns hasn’t been bailed out. It’s been liquidated to JP Morgan. They’ll chop the hell out of it, retaining mostly the prime brokerage, which they lack.

It’s a shit-storm. The yen is at 97 to a dollar; the Asian markets are diving now and Europe will follow in a five or six hours; the Fed cut the discount rate on a Sunday night; and gold is over $1,000.

It’s not reverse-trickle-down; it’s across-the-board down. Workers get fired, and most retirees lose income because their pensions get socked.

9

roger 03.17.08 at 3:23 am

I’ve been amazed at the Fed since last August. Where did this fear of a good couple of down days on the stock market come from? I feel like the day traders have kidnapped the U.S. treasury. If the market fell five hundred, one thousand points, if it went down to nine thousand, it doesn’t really matter that much. At the moment, corporations are more cash rich than they have been since the sixties. They’d operate fine, and the market would drift back up. The stock market is just an epiphenomenon, after all. However, the Feds daytrader strategy is ultimately leading us into disaster.

10

P O'Neill 03.17.08 at 3:34 am

The WSJ explains that bankruptcy was not an option

Bankruptcy experts said filing for bankruptcy protection wouldn’t have been an attractive option for Bear Stearns, partly due to recent changes in the federal Bankruptcy Code relating to financial instruments like derivatives and repurchasing trades. Unlike most parties in bankruptcy, lenders in such transactions aren’t stayed or prevented from acting to seize or control the assets involved in those deals.

“They can send you a letter saying the value of the assets is falling, so either pay us back or we will liquidate the asset,” said Holly Etlin, a managing director at AlixPartners, a turnaround and business advisory firm.

11

christian h. 03.17.08 at 3:36 am

c. l. ball, but that’s precisely it: of course people get hit, because there are real economic problems. But the people loosing their jobs and pensions aren’t the ones getting the help from the Fed. (It definitely looks like a bail-out to me. The fed is taking on “illiquid assets” as collateral for loans. The way I understand it, the assets in question are mortgage-backed securities securitizing mortgages that really should be safe that simply can’t be traded right now – that is, in theory the Fed is simply making rock-solid illiquid assets liquid – but if you believe that I’ve got a bridge to sell.)

12

luci 03.17.08 at 3:47 am

“Some light relief is provided by the announcement by Standard & Poors, the day before Bear imploded, that the worst was over”

I also guess that there’s a quite bit more pain left for the financials, and the coming recession will depress other sectors. But S&P says, of the 1.2 trillion outstanding subprime debt, they expect 200-300 billion to go bad. And 180 billion has been written off already. So, arguably, they’re over the hump.

I wonder if other pessimists expect that the 200-300 billion number will prove larger, or that the credit crisis will infect other markets, like Mr. Quiggin’s previous post forebodes, so the 1.2 trillion at risk is larger.

13

Walt 03.17.08 at 3:50 am

It’s everyone who does business with Bear Stearns who’s been bailed out.

Roger, the issue is not the stock market. The issue is that the banking system is in danger of collapse.

14

Glen Tomkins 03.17.08 at 4:08 am

White Knights or vultures?

If memory serves, the original robber baron JP Morgan made his great fortune by causing crashes and panics, and then buying up for pennies on the dollar the distressed properties his depredations had created. But, of course, we no longer live in such benighted times, and surely the contemporary firm founded by Morgan could not even be thought to have any hand in creating these conditions from which it has profited. Nowadays the robber barons simply rent a government to create the disasters from which they profit.

15

Harl Delos 03.17.08 at 4:24 am

A minor quibble: they’re paying $236 million, which figures to a little *less* than $2 a share.

A couple of years ago, that stock sold for $170 a share, and 30% of it was held by employees, mostly by the folks at the top, so there’s no lack of consequences for those whose irresponsibility created this crisis.

According to Reuters, JPMorgan CFO Mike Cavanagh says taking over Bear would generate about $6 billion in merger-related costs. About $1 billion would go to severance-type costs.

I don’t know what the rest goes for, but I bet there’ll be no shortage of lawyers getting paid well. Anyone want to take up a collection to buy some more ammunition as a gift for Mr. Cheney?

16

roger 03.17.08 at 4:29 am

Walt, the Fed has taken the symptom – the Stock Market falling – way too seriously. There was no way last August the banking system was going to fail. And, in truth, the banking system that does what it used to do – the Wells Fargos of the world – IS in fairly good shape.

Of course, if you have a financial system that is making enormous equity bets, you can’t let the stock market fall too much, can you?

On the other hand, we live in a world in which 70 trillion dollars in derivatives supposedly exist out there. At a certain point, reality has to catch up with what is, in essence, fiat money created by the financial sector. If all of those derivatives were redeemed tomorrow, the ratio of redemption would be something like the ratio between Bear Stearns book value and its purchase price. Eventually, that system is going to blow up. Or at least, it is going to shrink.

But is it going to affect anybody’s ability to get a house, any business’ ongoing expenses? I don’t know.

I still think this is going to be a three trillion dollar recession, and that it has little to do with the banking system – or perhaps I should say, the banking system is a symptom of the deeper cause. That is the stasis of wages that was compensated for, incompletely, by the inflation in assets over the last eight years, allowing the spread in the wealth disparity between the wealthiest and the middle and working class – the bottom 80 percent – to spread enormously. Which is pretty hazardous when the consumer spending accounts for something like 73 percent of the U.S. GDP. The spread was papered over by easy credit, and that in turn meant that the growth rate for consumption over the growth of GDP over the last ten years has been about 3 trillion dollars according to Business Week. Until that gap closes, we will be in trouble.

17

derrida derider 03.17.08 at 4:29 am

Lil Bob (Gene Hackman), lying mortally wounded:

“I don’t deserve this”

William Moony (Clint Eastwood), aiming the coup de grace:

“Deserves got nuthin’ to do with it”

And deserves got nuthin to do with this.

Of course it’s unfair that taxpayers have to bail out overstretched bankers, but the consequences for those taxpayers will be worse if they don’t. Nationalisation is arguably fairer (but then those executives wouldn’t exactly walk away impoverished by it), but it would cost taxpayers just the same and anyway it aint gunna happen in the US of A. So a bailout is what has to be done.

18

derrida derider 03.17.08 at 4:37 am

And yeah, I agree with roger that this has deeper causes than a simple financial panic. Or rather, those deeper causes make the whole machinery vulnerable to a simple panic following some over-optimistic investments. The new Gilded Age may suffer the same instabilities the old Gilded Age did.

19

Walt 03.17.08 at 4:56 am

Roger, I don’t understand your argument at all. Of course as far back as August the banking system was headed for failure. Nothing the Fed has done has changed that.

20

roger 03.17.08 at 5:55 am

Walt, I think you are exaggerating – the ‘bank system’ wasn’t headed for failure last August. Certain parts of the financial sector certainly were. And it was a great time for them to fail – the third quarter of 2007 had the fast GDP growth, and corporate earnings were great.

By trying to keep the market from falling – and the Fed responded not to some independent audit of mortgage firms and hedge funds, it responded directly to the stock and credit markets – the Fed both masked the problem and spread it. Masking the problem was ultimately completely pernicious – the system, as per Bear Stearns, exists on confidence. Once you start bullshitting about how good things really are, you better be sure they are really good. Of course, that bullshitting also hinders you from taking actions that might address the weak players, by showing up your words as hollow. This weekend might well have doomed the minimum amount of credibility Paulson has. And by responding to the market continually, the Fed spread moral hazard – it assured the market that it would keep coming back, like Doctor Feelgood, to administer shots.

It is obvious that Bear Stearns should never have had a book value of 80 per share in December. And it wouldn’t have – or perhaps it wouldn’t have – if the Fed had not intervened by aggressively cutting interest rates and opening the lending door in August. That was simply way too soon. The majority of economists that I’ve read think that the Fed did a great job coming in and intervening like that. That’s because economists, now, suffer from the same managerial hubris they suffered from, collectively, in the seventies, when they thought they knew exactly how to control an economy.

If what you are saying is true – if the whole banking system was “headed for failure” back in August, then of course the Fed operated with almost criminal negligence, like trying to bandage a volcano. I doubt very seriously the banking system was headed for disaster back then, though – and I think the Fed’s reassuring steps, going deeper and deeper into capture by the market, have been a totally misguided course.

21

roger 03.17.08 at 6:06 am

ps – hmm, I’d like to hear an Efficient’s Market explanation of Bear Stearn’s prices. It would be an exercise in fiction worthy of a Calvino short story.

22

abb1 03.17.08 at 9:19 am

I’m not sure I know what I’m talking about, but as far as nationalization is concerned: don’t all those social-democratic European (and other) states tend to nationalize, fix and then quickly privatize again? Because the prevailing dogma everywhere these days is to privatize anything and everything, correct? And if I’m right, then how’s that not a bailout? Seems to me, compare to the Europeans the Fed’s just skipping unnecessary steps.

23

Ginger Yellow 03.17.08 at 11:39 am

“Walt, the Fed has taken the symptom – the Stock Market falling – way too seriously. There was no way last August the banking system was going to fail. And, in truth, the banking system that does what it used to do – the Wells Fargos of the world – IS in fairly good shape.”

The stock market isn’t the symptom the Fed has been looking at (at least not in the last month. They’ve been looking at agency MBS spreads, the Libor to Treasuries spread, financial institution CDS spreads and other indicators of bank liquidity and credit market stability. All the signs have been horrendous. There’s been a complete meltdown of liquidity in the last couple of weeks, worse even than the squeeze last December.

24

Matt Canavan 03.17.08 at 11:43 am

Another minor quibble, are you sure they haven’t leveraged the building? If you take the asset off their balance sheet, you need to take any associated debt off as well.

25

MFB 03.17.08 at 12:21 pm

abb1 has a point, but thing is, in the past Europeans did nationalize and then hang on to things like collapsing banks. That was a smarter move than allowing things to collapse (thank you, Cde. Hoover). Now, it’s true, the Europeans are being told to be more American. So they all march together into the centre of the Big Muddy . . .

26

novakant 03.17.08 at 1:25 pm

in the past Europeans did nationalize and then hang on to things like collapsing banks. That was a smarter move than allowing things to collapse

I think you got that partly backwards. European countries have been privatizing their state owned companies for decades now – that’s just the trend, occasional moves in the opposite direction notwithstanding. And it’s not as if state-ownership fixes anything. Many problems have been created precisely by the (partly) state owned nature of certain banks and companies, both for business and taxpayers – e.g. the banking scandal that brought the state of Berlin to its knees or the corruption scandal at VW.

27

Righteous Bubba 03.17.08 at 3:07 pm

house of cards

Har har via Atrios:

NEW YORK (Reuters) – Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research) Chairman Jimmy Cayne was playing cards in a tournament late last week while his company’s future appeared to be at risk, according a published report.

28

KipEsquire 03.17.08 at 3:24 pm

Bear Stearns does not own the land (99-year lease) and has already sale-leasebacked the building.

This does not entirely negate the “negative enterprise value” thesis, but it does make it more complicated than “it’s worth $1.2 billion.”

29

Quo Vadis 03.17.08 at 4:01 pm

Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research) Chairman Jimmy Cayne was playing cards in a tournament late last week while his company’s future appeared to be at risk, according a published report.

Maybe we would all be better off if the banks weren’t run by poker players.

Seriously though, how did anyone who was around during the S&L crisis or the Internet bubble collapse not see this coming years ago?

Oftentimes while deleting my daily deluge of email spam re-fi offers, I would reflect on the occasional lemming-like behavior of these highly trained and compensated finance geniuses and think to myself: This won’t end well.

30

Barry 03.17.08 at 5:18 pm

“I would reflect on the occasional lemming-like behavior of these highly trained and compensated finance geniuses and think to myself: This won’t end well.”

See Krugman’s “SEVEN HABITS OF HIGHLY DEFECTIVE INVESTORS”, at
http://delement.typepad.com/my_weblog/files/krugman_7habits.pdf

31

Barry 03.17.08 at 5:20 pm

Key quote from that article:
“7. Play with other people’s money. If, as I said, the people at that meeting were very
smart, why did they act in ways that seem so foolish? Part of the answer, I suspect,
is that they are employees, not principals; they are trying to make money and careers
for themselves. In that position, it is hard to take a long view: In the long run,
even if you aren’t dead, you probably won’t be working in the same place. It is also
difficult for someone managing other people’s money to take an independent line. To
be wrong when everyone else is wrong is not such a terrible thing: You may lose a
bonus, but probably not your job. On the other hand, to be wrong when everyone
else is right…
So everyone focuses on the same short-term numbers, tries to ride the
trends, and buys the silly economic theory du jour.

32

aaron 03.17.08 at 5:20 pm

Quo vadis, you seem to answer your own question. A lot of people knew that it wasn’t going to end well, but that’s different from knowing what to do about it.
To quote Frost: some say the world will end in fire. Some say in ice. Some say in a massive liquidity meltdown.

33

John Lee 03.17.08 at 5:32 pm

Where is the Badder Meinhof gang when you need them? It’s time enough to start shooting at the bad guys.

34

lemuel pitkin 03.17.08 at 6:13 pm

17, meet 33.

Derrida Derider captures the official position here — his argument can be sumamrized as “There is no alternative. Because we say so. Shut up!” But if fair has nothing to do with it — if all that matters is who’s holding the gun — then at some point people are going to start wanting some guns of their own.

35

Walt 03.17.08 at 7:16 pm

Lemuel, do you want bread lines? 25% unemployment? I don’t want to lose my house, my car, my job, just because you feel bad about bailing out Bear Stearns. Step 1, we prevent the financial system from collapsing. Maybe in step 2 we shoot the people responsible.

36

Watson Aname 03.17.08 at 7:56 pm

I doubt you’ll find many people who want bread lines Walt. Rounding up a few patsys and shooting them is fairly useless though. The people `responsible’ are emergent properties of a system that encourages this sort of game.

37

lemuel pitkin 03.17.08 at 7:58 pm

Walt-

Of course I don’t want financial collapse. My point is that the Derrider’s take is profoundly shortsighted.

In the short run, bailing out Bear Stearns may avoid financial panic. But in the long run, the “deserve’s got nothin’ to do with it” approach guarantees further crises and undermines the legitimacy of government and the financial system in the eyes of those who didn’t get such assistance.

If you’re going to have a bailout, you need to ensure that those whose actions precipitated it still bear real costs. And you need to replace the market sanction you’ve taken off the table with increased oversight and regulation. And the only way you get that is by holding out the possibility that there will be no bailout, otehrwise. But derrida derrider doesn’t want to have that conversation, he wants us to just shut up and accept the inevitable.

I also think it’s funny that someone whose whole deal is hating on postmodernists now says that rational argument is irrelevant, all that matters is who’s holding the gun.

38

abb1 03.17.08 at 8:52 pm

These crises just don’t happen often enough and they aren’t predictable enough to guarantee that ‘holding the bad actors responsible’ will serve as a deterrent. I believe #36 is correct that this an institutional failure rather than misbehavior of individuals. Individuals in this case are perfectly rational actors. Shoot them all today, there will be a legion of new ones doing the same thing tomorrow.

39

lemuel pitkin 03.17.08 at 9:02 pm

These crises just don’t happen often enough and they aren’t predictable enough to guarantee that ‘holding the bad actors responsible’ will serve as a deterrent.

No, it won’t. That’s why you need to regualte the financial system directly, and not (only) through incentives.

But lining those responsible up against the wall, literally or figuratively, would go a long way toward establishing that we live in a system of laws and not just the raw exercise of power. Plus, you know, they deserve it — and unlike derrida derrider, I think that matters.

40

a 03.17.08 at 9:11 pm

I think people are a bit too confident that the Fed bailed out Bear Stearns to avoid financial collapse. It is seems to be just as probable that the bailing out of Bear Stearns will cause a financial collapse.

Basically the behaviour of the Fed for the past twenty years has been to do the most expedient thing and worry about the consequences later. We will be paying a high price for this lack of fortitude.

41

c.l. ball 03.17.08 at 9:48 pm

re 29 He plays bridge, not poker.

And we know Derrida Derider visits Ropes of Silicon.

42

jj 03.17.08 at 10:27 pm

Well, it wasn’t the Fed which repealed the Glass-Steagull Act, was it?

43

roger 03.17.08 at 10:27 pm

It is really, really unlike that anybody is going to get lined up against a wall. That policy option is out in these here states, although it is a fantasy that could come to your multiplex next year, if things get really rough.

I can think of two other things to do, right away:
a. encourage a rational compensation structure in corporations. In the 1980s, the upper management got paid around 90 times the lowest salary. As we all know, it now various from 200 to 400 times. There’s a pretty simply tax solution for this – give tax breaks to those corporation who achieve the 90 times ratio, and tax penalties to those who don’t. Plus, of course, raising taxes on the top 1 percent.
b. treat financial instruments like drugs. Instead of allowing CDOs and Heebeejeebees to be put out invented and put out there with no or little regulation, they should be examined exactly as drugs are examined. What are they for? Can they be abused? Etc. Those that did not past the Security board examine should then be banned. And guidance for use can result in those who violate those rules losing their licences. At the moment, we are much too lax about these things.

44

lemuel pitkin 03.17.08 at 10:34 pm

It is really, really unlike that anybody is going to get lined up against a wall.

It’s not a binary. There are a range of possible consequences for the executives at a bailed-out firm like Bear Stearns. Obviously they are not literally going to be shot but there are a range of things more or less along those lines that could indeed happen. Like, they could go to jail.

Anyway, *talking* about shooting Bear Stearns executives seems like it only lead to good things.

45

Keith M Ellis 03.17.08 at 10:44 pm

“Maybe we would all be better off if the banks weren’t run by poker players.”

As c.l. ball notes, Jimmy Cayne is a bridge player, not a poker player (and, as such, is much more in character for a banker). Erroneously jumping to the poker conclusion to make what possibly seemed to some to be a salient point in a blog comment should be some sort of a lesson, though I’m not sure which one.

46

Sebastian Holsclaw 03.17.08 at 11:21 pm

“In the short run, bailing out Bear Stearns may avoid financial panic. But in the long run, the “deserve’s got nothin’ to do with it” approach guarantees further crises and undermines the legitimacy of government and the financial system in the eyes of those who didn’t get such assistance.”

Why is everyone talking about a bailout? Bear Stearns investors are losing everything and almost certainly getting less than they would in bankruptcy. And that is as it should be. They made poor choices and lost 98% value on their investment.

The key is to create a situation where you don’t sell off all the assets at once, flooding the market and knocking off prices further. This way you get an orderly sell off over time.

47

jj 03.17.08 at 11:34 pm

Well, you know, I predicted it.
I knew they had to fall.
How did it happen?
I hope their suffering was small.
Give me every detail.
I’ve got to know it all.
And do you have a picture of the pain?

48

shteve 03.18.08 at 8:57 am

I don’t think BoA/Countrywide is a done deal yet – as far as I recall, BoA retains some kind of option until September, with share price target at $17. That could blow up, like Citic’s arrangement to pour $1 billion in to Bear Stearns.

49

almostinfamous 03.18.08 at 9:09 am

Sebastian Holsclaw says: Why is everyone talking about a bailout?

there’s about 30 billion reasons why.

50

Cryptic Ned 03.18.08 at 1:41 pm

Why is everyone talking about a bailout? Bear Stearns investors are losing everything and almost certainly getting less than they would in bankruptcy. And that is as it should be. They made poor choices and lost 98% value on their investment.

No, the investors didn’t make poor choices. The Bear Stearns executives who actually controlled the company made poor choices, and are being bailed out, in that they don’t lose their jobs or their money, aside from what small proportion of their fortunes is actually in BS stock at this very moment.

51

abb1 03.18.08 at 3:31 pm

The Bear Stearns executives who actually controlled the company made poor choices…

Depending on how much moolah they’ve managed to acquire for themselves over the last few years, they, in fact, might’ve made excellent choices.

52

Sebastian Holsclaw 03.18.08 at 3:57 pm

“The Bear Stearns executives who actually controlled the company made poor choices, and are being bailed out, in that they don’t lose their jobs or their money, aside from what small proportion of their fortunes is actually in BS stock at this very moment.”

Since the company was largely employee owned, your division between stockholders and executives isn’t accurate.

And since JP Morgan is talking about laying off half of Bear Stearns in the acquisition (see for example here) they aren’t keeping their jobs either.

Which leaves I’m not sure what of your argument to respond to.

53

roger 03.18.08 at 5:51 pm

“Since the company was largely employee owned, your division between stockholders and executives isn’t accurate.”

Actually, no. There’s a difference between – a large share of the employees own stock in the company – and – the company is largely employee owned.

That said, anybody whose read the Times realizes that JPM is working out the details to retain Andrew Schwartz, who we are assured is a huge “asset” to Bear Stearns.

The larger point, however, is that this was, of course, a bail out. The Fed, loaning money to JPM for the takeover, accepted as collateral securities which no bank would have accepted as collateral. Now, if you go to the fed, say I want a loan of 30 billion dollars, and as collateral, here are all my dirty t shirts – and they give it to you – that is called a bail out.

But of course, in rightwing America, where the S-Chip is a wild and whacky form of Leninism, money going directly from the government to the wealthiest is simply considered part of the proper feudal order.

One of the things that has not been commented upon enough is the Brownie like behavior of Bush’s SEC Chair pick, Cox. This is a pretty good link summing up the case for Cox resigning. Cox’s statement last Tuesday – “We have a good deal of comfort about the capital cushions that these firms [the five largest investment banks, which included Bear Stearns] have been on” should definitely be put on the roll of funny moments in the Bush reign of error. Well, elect a chimp, get ruled by apes. I guess that is the rule.

54

jj 03.19.08 at 2:33 am

I was particularly impressed by his recent remark that a premature withdrawal from Iraq would be allegorically equivalent to “driving the country into a ditch”, which reminded me of those bumperstickers, stating: “Frat Boy Drives Country Into Ditch”.

55

jj 03.19.08 at 2:39 am

On the other hand, maybe it’s all just another wrinkle in the neocons’ version of disaster capitalism.

56

derrida derider 03.19.08 at 3:21 am

“But derrida derrider doesn’t want to have that conversation, he wants us to just shut up …”
Fat chance of that.

Look, my heart says some of these scum should be shot too (though on what we know so far, Bear Stearns’ people were no more unwise or greedy than their peers – they just happened to be the first to face the inevitable run). Nationalisation would at least take their bonuses and put them out of a job.

But my head says that on Friday the Fed had no choice but to do what it did, for fear of much worse injustice (ie average joes losing their jobs). By all means argue about overly-lax credit, regulation, etc afterwards. In the meanwhile this was battlefield medicine.

57

Ragout 03.19.08 at 4:18 am

I’m inclined to believe that the BS bailout was a good thing (that needs to be followed up by an army of government accountants regulating the “safety and soundness” of investment banks) since financial panics are a really bad thing.

But still, why should I believe that the Fed is acting in the best interests of the public? The NY Fed, which seems to take a lead role in these kind of things, has a 9 member board, 6 of whom are chosen by bankers. The NY Fed board includes Jamie Dimon , the CEO of JPMorgan Chase. The chair of the NY Fed is Stephen Friedman, who is also the chaiman of Stone Point Capital and retired chairman of Goldman Sachs. So, what exactly should persuade me that this wasn’t just a case of a bunch of bankers using $30 billion in public money to eliminate their competition?

58

dawud 03.20.08 at 11:45 pm

The free-market advocates at the CATO institute argued in 1998 against a bail-out of the hedge-fund firm Long-Term Capital Management, arguing
“intervention also [has] more serious long-term consequences: it encourages more calls for the regulation of hedge-fund activity, which may drive such activity further offshore; it implies a major open-ended extension of Federal Reserve responsibilities, without any congressional authorization; it implies a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encourages irresponsible risk taking; and it undermines the moral authority of Fed policymakers in their efforts to encourage their counterparts in other countries to persevere with the difficult process of economic liberalization.”

http://www.cato.org/pubs/briefs/bp-052es.html

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