Making The World Safe For Billionaires
Ill: Wizard of Whimsy
The Troubling Paradoxes of Capitalism
~ America's First MBA/CEO President Bails Out a "Riverboat Gambler" using the Fed to do it ~ hey, we didn't say he was a good CEO!
Deliciously ironic (if you like these sorts of ironies), the Fed resorts to a little-used Depression-era law to effect a bailout of Wall Street giant Bear Stearns, which is, in case you missed it, an investment bank (not a regular commercial one) that had a hand in the ingenious packaging of sub-prime loans such that nobody could follow or figure out what was in them after an innovative wash-spin-rinse cycle. The bailout set off a firestorm of controversy.
The New York Times provides the back story:
..."But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.
"And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.
"Bear’s default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4 percent.
"Let’s not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.
Recall, too, that back in 1998, when the Long Term Capital Management hedge fund required a Fed-arranged bailout, Bear Stearns refused to join the rescue effort. Jimmy Cayne, then chief executive at the firm, told the Fed to take a hike.
Recall, too, that back in 1998, when the Long Term Capital Management hedge fund required a Fed-arranged bailout, Bear Stearns refused to join the rescue effort. Jimmy Cayne, then chief executive at the firm, told the Fed to take a hike.
"And so, Bear Stearns, a firm that some say is this decade’s version of Drexel Burnham Lambert, the anything-goes, 1980s junk-bond shop dominated by Michael Milken, is rescued. Almost two decades ago, Drexel was left to die.
"Bear Stearns and Drexel have a lot in common. And yet their differing outcomes offer proof that we are in a very different and scarier place than in the late 1980s.
'Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?' asked William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve. 'This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation.'”
'Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?' asked William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve. 'This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation.'”
The comments to a Wall Street Journal blog entry explaining the Depression-era law still on the books indicates that even dyed-in-the-wool Republicans were reconsidering the whole capitalistic free-marketeer enterprise:
"Bear is an 'investment bank', not a 'commercial bank' like Bank of America, Suntrust, Wachovia, etc. Given this, why is the fed involved. These investment banks are riverboat gamblers and now the Fed is sanctioning their actions. This is a bailout. I’ve tried to be level headed about this, but I think this goes too far. I consider myself a conservative, but I have come to the conclusion that some industries should be regulated. Banks, airlines and utilities all spring to mind. De-regulation hasn’t worked in these industries.
Comment by What do I know"
Comment by What do I know"
"Let’s see. The money is funneled through JP Morgan, but if Bear defaults, the taxpayers pick up the tab? I’ve been a Republican a long time, but this makes no sense anymore. What’s in it for JP MC? This is getting very confusing. Does Morgan Chase take a cut of the action or what?
Comment by CC "
Comment by CC "
"I want to be JP Morgan! They get to make money from making a risky loan to Bear Stearns, but if it turns bad then the Fed picks up the risk!Who’s underwriting the Fed, then? The Chinese?How the pecking order has changed!
Comment by Greg T "
Comment by Greg T "
"I believe that the Fed is trying to avert a complete economic collapse. The easy credit given out was completely insane, and the motivation was pure greed. However, there are millions of Americans invested in these companies who are not independently rich but saving for retirement. A complete collapse would wipe out many taxpayers’ hard earned savings and investments. The Federal government could have stopped this right away but everyone in Washington, D.C. is bought by Wall Street and every other major industry. I would like to see strict regulation, which is rigorously enforced. I doubt that will happen. Bush’s pep talk about the economy is not going to change people’s minds. It will be years before people recover from this mess and some will not. I would not rule out a very long and deep recession. A depression would not surprise me either. Wall Street definitely needs regulation, a concept alien to far too many in Washington and the people at the WSJ. Capitalism needs some restraints. Booms and busts do not work and the proof is being seen everyday.
Comment by Jake"
Comment by Jake"
"Privatize profits, socialize losses. That’s the system we’re operating under. I’m glad to see the comments from several Republicans who finally realize that this business of skewing all policy to favor the rich has finally reached its endgame.
Comment by John R"
Comment by John R"
Maybe America's gamblers on Wall Street have finally overcome the deregulation mania that started with the Reagan administration and trickled on down to the present day, having reached its zenith in the person of one GWB (pictured above).
Speaking of whom, if you didn't see his pathetic presentation on the economy in the past several days, watch a mercifully abbreviated version here, and note the transparent and not very well executed efforts at diversion (your Demon particularly likes "9/11!"): http://youtube.com/watch?v=3XssEHgOYZI
However, everyone has noted by now that Bush won't admit the depth of the stuff we're swimming in, and everytime he speaks on the topic it brings to mind what a landmark excercise in denial and propagandistic talking points it is to be America's 1st MBA President ~ worthy of a leader of Soviet Russia or Communist China in their heydays~ heaven forbid, there cannot be a recession, much less a full-blown depression ~ because George SAYS there isn't! Much as there are no real problems with finding work, or inflation, or food costs, etc. etc.
Meanwhile, a Harvard economist says we may be headed for a "slump" the magnitude of which this country hasn't seen since World War II.
"The United States has already slipped into a deep recession that could be the most serious since World War II, said Martin Feldstein, president of the Cambridge group that is considered the official word on economic cycles.
"'The situation is bad, it's getting worse, and the risks are that the situation could be very bad,' Feldstein said in a speech yesterday at a financial industry conference in Boca Raton, Fla.
"'The situation is bad, it's getting worse, and the risks are that the situation could be very bad,' Feldstein said in a speech yesterday at a financial industry conference in Boca Raton, Fla.
[...]
"Also yesterday, Macroeconomic Advisers, a St. Louis consulting firm run by several former Federal Reserve officials, said the US economy barely grew in January and predicted it declined by 0.7 percent in February.
"Feldstein's remarks were punctuated by an extraordinary run of alarming developments yesterday, including surging oil prices, new worries about home foreclosures, and the near collapse of a venerable investment bank that sparked another rout in stock prices on Wall Street.
"US investment giant Bear Stearns Cos. yesterday morning received an emergency bailout loan for an undisclosed amount that was facilitated by the Federal Reserve Bank, which invoked a little used Depression-era measure to unleash the funds. Bear Stearns is in dire need of cash after it was forced to write off billions of dollars of losses in mortgage-related investments, and worried investors withdrew their funds.
"Bear Stearns's stock lost $3.2 billion of value yesterday, almost half its market capitalization. The major stock indexes all posted steep declines, with the Dow Jones industrial average down 195 points to close below 12,000.
"US oil prices, meanwhile, remained above $110 a barrel, after hitting a record $111 on Thursday, putting increasing strain on consumers and businesses alike. United Airlines and Continental Airlines raised round-trip fares by as much as $50 a ticket to help recoup the cost of rising jet fuel prices, the latest in a wave of ticket increases throughout the industry. Heating oil and gasoline prices also surged.
"Rising oil prices, in turn, are driving up prices for everything from food to electricity, threatening to end years of modest inflation. Gold prices hit a fresh record yesterday, as investors embrace it as a hedge against inflation and a weakening US dollar, which remained at lows against the euro.
"Earlier this month the US Labor Department reported that private employers slashed their payrolls by 101,000 jobs in February, the third straight month of job reductions. Also yesterday a widely followed monthly index of consumer sentiment posted a 16-year low."
Here in Seattle, we got the cheery news over the weekend that we have one of the highest inflation rates in the nation:
We're told that's good news because we still have a strong economy ~ for now.
Wait here while your Demon goes to count her blessings and her store of canned tuna.
posted by Demon Princess at 9:59 PM
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