The Fall of Bear Stearns

The fall of Bear Stearns:

There I was, yesterday, opining to Barry Eichengreen that Ben "Credit Channel" Bernanke was not going to let Bear Stearns collapse, was going to rescue it--and that as a result BS was a buy Thursday afternoon.

Never have I felt so right--and so wrong--as I do this morning.

From my perspective, I thought this morning's news was good: J.P. Morgan feels strong and liquid enough to undertake a rescue. I had not known that. That makes me think asset prices today should be higher--not lower.

But clearly I am not Mr. Market...

Comments

[esb]

JPM is not undertaking the rescue of BSC.

You (along with all of the other taxpayers in the USA) are.

The time for illusion, slight of hand and BS has come and gone.

[save_the_rustbelt]

The rise of Berekley........... Congrats to Berkeley faculty:

March 14, 2008
Berkeley Amasses $1.1-Billion 'War Chest' to Prevent Professor Poaching

The University of California at Berkeley has accumulated a $1.1-billion “war chest” to fend off Ivy League poachers, the Bloomberg news service reported today.

Berkeley administrators hope the money, which will go toward endowed chairs for 100 professors, will dissuade faculty members from defecting to wealthier competitors like Harvard and Yale, where salary offers are significantly higher.

For the 2006 fiscal year, full professors at Berkeley earned an average of $134,672 and associate professors $88,576 — about 15 percent less than peers at private institutions. And, since 2003, the California university has lost at least 30 faculty members to its eight main competitors, chief among them Harvard.

“These institutions are competing for exactly the same faculty that we are trying to hire, and so an important question is whether the public universities are going to be able to compete,” said Berkeley’s chancellor, Robert J. Birgeneau.

Mr. Birgeneau also announced plans to restructure Berkeley’s $2.9-billion endowment, to match Harvard’s 23-percent return on its $34.9-billion fund.

Berkeley, which faces a 10-percent cut in state support under Gov. Arnold Schwarzenegger’s proposed budget, plans to raise $107-million from donors and to add it to a $113-million grant from the William and Flora Hewlett Foundation to help create the 100 endowed chairs. —Paula Wasley

[save_the_rustbelt]

Bernanke sounded a lot like an economic professor today.

Oh, yeah he is...... except with immense power and influence.

[Cal]

According to Krugman this morning in the NYT, this could be just a small bandage on a a gaping shotgun wound. That's why asset prices are down. Too much uncertainty.

[Neal]

The Fed is rescuing Bear Steans through the auspices of JPM Primary Dealer status.

The Fed, not JPM!!!

The dollar will fall until the disclosure of ultimate losses are made and banks are allowed to fail. Until then smart money and even sorta-dumb and some dumb money will stay away. Throwing money into a bottomless pit is not a career-preserving move, even for the sovreign wealth people. Even the Treasury printing press will run out of ink.

This is especially bad for a debtor nation like the US.

It would be especially appropriate at this time for the Fed to follow through on some of it's stated belief in "freedom to suceed or fail".

[anne]

http://krugman.blogs.nytimes.com/2008/03/14/evil-in-my-heart/

March 14, 2008

Evil in My Heart
By Paul Krugman

Wow. I’m spending spring break in an undisclosed location, and spent most of the day getting here. So I didn’t know about the Bear Stearns story * until a little while ago.

But when I did learn about it, I also learned that some evil lurks in my heart. I shouldn’t be feeling even a touch of glee over seeing a firm that has been such a major source of really nefarious economic nonsense ** get in trouble.

* http://bloomberg.com/apps/news?pid=20601087&sid=a2GF1oqbNCM0&refer=home

* http://bigpicture.typepad.com/comments/2008/03/malpass-ass.html

[anne]

http://krugman.blogs.nytimes.com/2008/03/14/my-friend-ted/

March 14, 2008

My Friend TED
By Paul Krugman

The TED spread * is the difference between the interest rate banks charge each other on 3-month loans (3-month LIBOR) and the interest rate on 3-month U.S. Treasury bills. It’s a measure of financial jitters. If banks believe that their peers are solid, they should be willing to lend each other money on almost the same terms as money lent to Uncle Sam. When they start demanding a big interest rate premium, that’s a sign of fear.

After dipping a bit — but not enough — on news of the Fed’s new policies, the TED spread has now shot up again in the wake of Bear Stearns. Things are not going well.

Still spreading [Chart]

* http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND

[anne]

http://www.nytimes.com/2008/03/14/opinion/14krugman.html

March 14, 2008

Betting the Bank
By PAUL KRUGMAN

Four years ago, an academic economist named Ben Bernanke co-authored a technical paper that could have been titled "Things the Federal Reserve Might Try if It's Desperate" — although that may not have been obvious from its actual title, "Monetary Policy Alternatives at the Zero Bound: An Empirical Investigation."

Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paper's suggestions into effect. Unfortunately, however, the Bernanke Fed's actions — even though they're unprecedented in their scope — probably won't be enough to halt the economy's downward spiral.

And if I'm right about that, there's another implication: the ugly economics of the financial crisis will soon create some ugly politics, too.

To understand what's going on, you have to know a bit about how monetary policy usually operates.

The Fed's economic power rests on the fact that it's the only institution with the right to add to the "monetary base": pieces of green paper bearing portraits of dead presidents, plus deposits that private banks hold at the Fed and can convert into green paper at will.

When the Fed is worried about the state of the economy, it basically responds by printing more of that green paper, and using it to buy bonds from banks. The banks then use the green paper to make more loans, which causes businesses and households to spend more, and the economy expands.

This process can be almost magical in its effects: a committee in Washington gives some technical instructions to a trading desk in New York, and just like that, the economy creates millions of jobs.

But sometimes the magic doesn't work. And this is one of those times.

These days, it's rare to get through a week without hearing about another financial disaster. Some of this is unavoidable: there's nothing Mr. Bernanke can or should do to prevent people who bet on ever-rising house prices from losing money. But the Fed is trying to contain the damage from the collapse of the housing bubble, keeping it from causing a deep recession or wrecking financial markets that had nothing to do with housing.

So Mr. Bernanke and his colleagues have been doing the usual thing: printing up green paper and using it to buy bonds. Unfortunately, the policy isn't having much effect on the things that matter. Interest rates on government bonds are down — but financial chaos has made banks unwilling to take risks, and it's getting harder, not easier, for businesses to borrow money.

As a result, the Fed's attempt to avert a recession has almost certainly failed. And each new piece of economic data — like the news that retail sales fell last month — adds to fears that the recession will be both deep and long....

[RedCharlie]

"live blogging" the debacle this am:
http://bigpicture.typepad.com/comments/2008/03/bear-stearns-ge.html

My fav part:
"10:33: If you are wondering WTF a non-recourse, back-to-back financing is, pull up a chair:
JPM gets to go the the Discount Window and borrow all the greenbacks they want; Then they loan that to Bear. In the event that Bear defaults, the NY Fed cannot go back to recover from JPM -- hence, non-recourse."

So yeah, neal and esb have it right. It's the Fed. JPM is carrying the suitcase of cash, but that's really the extent of their involvement. JPM is a nominal fig-leaf placed discreetly over the impolite reality that the banking system is being nationalized, right here, right now.

There is a grey area between equity and debt, but this is no more a "loan" than was Enron's off-the-books relationships with its many phony subsidiaries.

Mention "national" health care, and you get branded a commie. But BAM, Bernanke nationalizes the banks, and nobody says a word (except "gulp").

Just goes to show that when it's not the Red Army but the poorhouse that yer facin', "Better Red than Dead" doesn't sound so brave anymore, just stupid.

But never fear! A sudden "surge" in liquidity is bound to save the day! (That's why Bernake keeps doing it, right?) Just like the famous surge in another place that we won't mention...

[Neil B.]

Interesting how Bear Stearns gets a line to avoid going under, but the average schmuck rarely gets a lift if his little operation is going down. Lately, those facing foreclosure are mostly catching a break, but you see the difference ... What does that say about what the "free markets" philosophy really means? It means, free for the little guys, and subsidized for the big guys ...

[Neil B.]

Interesting how Bear Stearns gets a line to avoid going under, but the average schmuck rarely gets a lift if his little operation is going down. Lately, those facing foreclosure are mostly catching a break, but you see the difference ... What does that say about what the "free markets" philosophy really means? It means, free for the little guys, and subsidized for the big guys ...

[Ponzi Q. Globalization]

Let me link to a posting from a wise man on this very site from August...

http://delong.typepad.com/sdj/2007/08/federal-reserve.html#comment-79819863

So the bailout has come to pass. Surprise surpise.

I'm sure the swindlers on Wall Street are thanking heaven that there are well-meaning economics professors who provide an intellectual foundation for the bailout. For this is what the economic professors and others do by saying that some of the tools* that the swindlers on Wall Street use are too important to be allowed to fail. Now if only the same professors had sent up warning after warning after warning prior to the debacle we wouldn't be in this mess. Did our host give warning? Though I read the site fairly often -- though in bursts -- I really don't know.

It is disgusting that same swindlers that benefited from their elaborate swindles now not only get to keep their ill-gotten gains but can live to swindle another day. God bless the USA!

P.S. Where is the list of economics professors who are now (only now!) calling for a MASSIVE re-regulation of this industry so chock full of too-important-to-fail enterprises? Is anyone? Or are they so besotted by the neoliberal wonderfulness of the 'freedom' of capital and the fancy schmancy dream-like economodels that predict so little that they don't want to put a leash on these sharks pretending to be bankers.

P.P.S.

Disgusting.
Disgusting squared.
Disgusting to the aleph-nought power.
Bleech.

* e.g. Investment Banks

[christofay]

We're Spitzer nation

[christofay]

Bush on bailing out the banks:

I must say, I’m a little envious,” Bush said. “If I were slightly younger and not employed here, I think it would be a fantastic experience to be on the front lines of helping this young democracy succeed.”

“It must be exciting for you … in some ways romantic, in some ways, you know, confronting danger. You’re really making history, and thanks,” Bush said.

[Neil B.]

Heh, interesting twist on having a "bear market" ...

[jerry]

I think it's interesting how Bernanke can't catch a break.

Shortly after he shovels cash out of the helicopter, and the markets rise, a day or two later some bad news comes along to snatch all that cash away, and the markets sink.

In January it was Societe Generale. Today it is Bare Sterns. Both times (and other times) he should arguably have known what was going to happen. Is it a conspiracy to give taxpayer money away to the institutions? I imagine not, but it sure looks like one.

"Bare Sterns" IS an interesting name. After today's actions, I feel sore, exposed, and worried about talk of plugging future gaping holes.

[christofay]

Once the Ivories' endowments pass a billion dollars then their capital gains should be taxed. As long as they produce leadership on the order of Bernanke and Bush, it will be fair

[bigTom]

There is an ungoing theory (observation?) that whenever a new CEO takes over, among his first actions is the opening of all the secret closets. Better to expose all the skeletons while it is still possible to blame them on his predecesor. Does a similar dynamic apply to government? If the party in power changes in January of 09, does this mean the closets will be throw open, and all the bones will tumble out? Or are the politicians too timid to deliver so much bad news so quickly?

[prostratedragon]

Yep, I'd stick to the 'net for that all-important day or two heads-up. For quite a while.

One theory that's going around is that this is a bailout of BS's counterparties and such, of which JPM is the biggest and most capable. I.e., Bear itself is through. Does make sense, at least if you suspect that what we have going on here's got everyone's priors beat.

And speaking of Wile E. Coyote, there's another preliminary and highly relevant phase to his tribulations besides the cognitive lag that Krugman has modelled out. It is depicted in this cartoon, "Hopalong Casualty": http://tinyurl.com/2bkkk6
I was remined of this the other day while reading Greenlaw et al. on Leveraged Losses.

Trust me, you do so much want to follow that youtube link.
http://tinyurl.com/2bkkk6

[The Raven]

Obviously, we must have welfare for the rich.

More food for corvids! Caw!

[Oren Michels]

Roger Ehrenberg has an in-depth and very rational explanation of why, as he says, Bear "is toast", bailout or no bailout...

http://www.informationarbitrage.com/2008/03/the-bear-facts.html

[xfire]

Proves once again that Fed is Wall Street's b**ch