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March 17, 2008
Bear Stearns Socialism

On Friday Bear Stern shares closed at $30. Over the weekend it was sold to JP Morgan for $2 a share. To the NYT writer that is "about one-tenth the firm’s market price."

There you have the quality of economic reporting, or should we call it propaganda, that had a big part in building the debt bubble and its now occuring destruction. If 6.6% is "about one-tenth" there is quite some room to fudge the books.

Bear Sterans made its money through arrogant leveraging. They borrowed low-interest short-term money in a volume of 30 times their capital. Then they lend this money out for higher rates and for long term mortgages. The mortgages were decalred ‘assets’ and pledged as collataral against the borrowing.

When the people who gave money to Bear Stearns found out that many of the mortgages would likely default, they asked for more collateral or early payback of their loans to Bear Stearns. With the missmatch in maturity and a defunctional market of mortgage papers, Bear Stearns could neither give more collatoral, nor pay back what they had borrowed.

That’s when the Fed stepped in Thursday and gave them unknown billions for shabby collatoral. It did so again last night.

With $2 a share Bear Stearns now has capital of some $300 million. The Fed yesterday pledged to lend another $30 billion for Bear Stearns.

The company is thereby now leveraged at at least 100 to 1, more likely at 450 to 1, without any of its problems solved. It is bankrupt. I wonder how JP Morgan thinks it can survive the deal it just made.

There are many more candidates out there with the same problem. Lehman, Citibank, Washington Mutal …

They should be either let fall down or nationalized without paying one cent to the shareowners and with their management fired immediately without compensation. Anything else is socialism for the rich. Taxpayer money pledged to hold up the wealth of billionaires.

Just don’t expect the NYT to tell you that.

Posted by b on March 17, 2008 at 07:14 UTC | Permalink
Comments

Krugman: The B Word

Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.
But the Fed rode to Bear’s rescue anyway, fearing that the collapse of a major investment bank would cause panic in the markets and wreak havoc with the wider economy. Fed officials knew that they were doing a bad thing, but believed that the alternative would be even worse.
As Bear goes, so will go the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money.
The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.
If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.
As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.
According to late reports on Sunday, JPMorgan Chase will buy Bear for a pittance. That’s an O.K. resolution for this case — but not a model for the much bigger bailout to come. Looking ahead, we probably need something similar to the Resolution Trust Corporation, which took over bankrupt savings and loan institutions and sold off their assets to reimburse taxpayers. And we need it quickly: things are falling apart as you read this.

Posted by: b | Mar 17 2008 7:51 utc | 1

Okay, with anna missed’s recent art fresh in mind, this was to ironic not to post…

Posted by: Uncle $cam | Mar 17 2008 8:37 utc | 2

Wondering if getting Spitzer out of the way first was essential part of the plan. CAustin Fitts has some things to say about it, but partially above me. If anyone wants to weigh in w/translation for ec. illiterates that’d be appreciated I’m sure. She also neglects to tell us what % of Bear Shares were held by New York State Teacher’s Retirement System, not to mention what % of their assets are held in such risky investments. But you do get the clear sense that this was all about fleecing retirees, while the powerful moved their assets elsewhere. (e.g. Bushes bought 100k acres of land in Paraguay, above one the greatest aquafers in the world.)
To read Krugman one can’t be sanguine about chances of Fed being able to print enough bucks to stave off further crashes for 10 mos.

Posted by: jj | Mar 17 2008 8:50 utc | 3

“with their management fired immediately without compensation”
Personally, I’d even say “with their entire management sent straight to a chain gang”, because that’s the kind of places that was made for such crooks. But then I’d be called a gulag-loving stalinist.
Good to see people saying it like it really is, B.

Posted by: CluelessJoe | Mar 17 2008 9:17 utc | 4

You can handle 450X leverage when the loan is nonrecourse. This is just COMECON-style soft credit. Spaciba, commissar Paulsen.

Posted by: …—… | Mar 17 2008 11:02 utc | 5

so did JP Morgan just pick up all the loans that Bear Sterns had for 270 million?
That sounds like a pretty darn good deal to me. Most of those loans will be repaid and if they are not they must be backed with some kind of collateral. If JP Morgan doesn’t get the cash, they will get the property, right?
and, if what I understand from all this, the taxpayers are paying JP Morgan to do this as well.
it really is a beautiful system for the financiers, too complicated for simple folk like me to understand so they just set up the playing field in a way that they can never lose and we watch from the sidelines….mouth agape every time they pull off a spectacular play like this one.

Posted by: dan of steele | Mar 17 2008 11:12 utc | 6

A Chinese company chairman Greenspan has been sentenced to death for running a scam involving giant ants.
Har har har..

Posted by: Uncle $cam | Mar 17 2008 12:23 utc | 7

A million Iraqis dead, I can see not enough Americans caring about that to have any effect.
This plunder of the public purse, though — this has the potential to seriously piss off and motivate the working class on both sides of the cultural divide, if it were told straight.
It needs to be told straight, like b tells it, but told everywhere. It needs to be connected to everyone’s pension funds going away, because it is so totally connected. Graphs like this need to be shown.

Posted by: Cloud | Mar 17 2008 13:34 utc | 8

Billmon,
Never have so few, gained so much, from so many.

Posted by: Mr.Murder | Mar 17 2008 13:36 utc | 9

re Mr Murder, #9, they’re in an endgame and the tippytop know it.
Morgan family values have interest to the to the historically and economically minded.

Posted by: plushtown | Mar 17 2008 13:44 utc | 10

(sorry bad link #10)
to the historically and economically minded.

Posted by: plushtown | Mar 17 2008 13:47 utc | 11

jj@#3-
Greg Palast has a good story on the connections between Spitzer and the collapse of Bear Stearns.

Posted by: Bruce F | Mar 17 2008 13:53 utc | 12

Famous last words: “Never an unprofitable year“—Bear Stearns’ primary emphasis is on creating long-term value for shareholders.”
Oh, and good stuff plushtown…

Posted by: Uncle $cam | Mar 17 2008 14:12 utc | 13

We are all Bear Sterns now!

Posted by: R.L. | Mar 17 2008 14:25 utc | 14

plushtown – is it later yet? 😉

Posted by: jcairo | Mar 17 2008 14:26 utc | 15

Just for the hell of it…

Posted by: Uncle $cam | Mar 17 2008 15:34 utc | 16

Fuck the Dollar, Fuck the People: Bail out Wall Street…
From $30 to $2 a share over a weekend, geez…And these jackals want your 401 k’s and Social security next… and they’ll get it after you’ve paid for this bail out.

Posted by: Uncle $cam | Mar 17 2008 15:39 utc | 17

According to my local newspaper, JP Morgan bought the good parts of Bear Sterns, while the bad parts were taken over by the Feds. Good deal for everyone except the tax payers.

Posted by: a swedish kind of death | Mar 17 2008 17:54 utc | 18

@Uncle $cam #13, thanks, @jcairo #15, it gets later always until the fat lady drowns.
And yes, they will get all, for they control the recognized opposition.

Posted by: plushtown | Mar 17 2008 17:57 utc | 19

Krugman in an interview on how bad the situation is: How bad is the mortgage crisis going to get?

We’re probably heading for $6 trillion or $7 trillion in capital losses in housing. Some fraction of that will fall on owners of mortgages. I still think the estimates people are putting out there – $400 billion or $500 billion in losses – are too low. I think there’ll be $1 trillion of losses on mortgage-backed securities showing up somewhere.
…
There has been the realization that the increased nervousness about risk and deleveraging is going to hit a lot of markets a long way removed from subprime – like when people start to see auction-rate securities go. Something has finally tipped the balance. We’ve got Fannie Mae and Freddie Mac suddenly having to pay substantial spreads. It seems to me like every few weeks there’s another $300 billion market I’ve never heard of that has just collapsed. And there’s credit cards, auto loans – I don’t know what’s next. But it’s clear we’re going to have a commercial real estate crash not too far short of the severity of the housing crash.

I agree on that. But Krugman calls for further interest rate cuts and hopes the dollar will fall further. He thinks the risk of inflation isn’t great. There I think he is really wrong …

Posted by: b | Mar 17 2008 18:04 utc | 20

MF Global is the world’s leading broker for exchange-traded futures and options and an important intermediary in the markets for other major financial instruments around the world.
NYSE : Stock is Down 9.34 (53.83%)
Open 16.11 Now 8.01.
Not only the banks, the brokers too.

Posted by: curious | Mar 17 2008 18:24 utc | 21

if that was not so fucking dark it would be comical
those who detest health care, welfare, housing assistance – ô they love them some socialised capital coming out of the pockets of citizens & their descendants

Posted by: remembereringgiap | Mar 17 2008 18:33 utc | 22

Perhaps over the top?
THE TOTAL COLLAPSE OF THE GLOBAL ECONOMY
I say very plausible..

Posted by: Uncle $cam | Mar 17 2008 18:40 utc | 23

& that is one of the mysteries of capitalism
that it has always hidden from the people – the people who pay – the real cost of capitalism & its continuing criminal practices – whether it was monopolies, cartels, junk bonds, saving & loans subpriime etc etc etc
& the deception always seems to work no matter how far the masses fall
in the great crash we are repeatedly told the story of the stockbrokers jumping out of windows in wall street – but we are never told of the tens, indeed the hundreds of millions whose lives were changed forever by a capitalism that never gave a fuck about them except as commodities

Posted by: remembereringgiap | Mar 17 2008 18:41 utc | 24

Jeb Bush is a shoe-in in 2012 with all these favours.

Posted by: Cloned Poster | Mar 17 2008 19:05 utc | 25

& i guess as jérôme would say it encapsulatues capitalism at its most crude & brutal – “to privatise profits & to socialise losses”

Posted by: remembereringgiap | Mar 17 2008 19:15 utc | 26

@ rgiap #24, yes, Charles Fort was right, we are property, and commodities traders and mining company owners know the most about property. But how (in US)could it be otherwise, corporations by definition are sociopathic yet by precedent (not by fiat, was in Supreme Court Reporter’s headnotes)are persons. Persons who must, morally, be sociopathic. (Any other person who produced thousands of pounds of pig feces in a few weeks in bucolic Pennsylvania would not be served in the restaurants.)
hands up!
sauce simmering!
marinade mesmerizing!
repast at last.
(Am not sure about last’s implications, such fit but could easily be entirely (partially’s a given) disinformation, as could the Luciferian stuff.)
We’re in the pound, the gas bill is paid, and only that mean but interesting smelling guy can read the calendar.

Posted by: plushtown | Mar 17 2008 19:40 utc | 27

Obviously Lehman is the next to go down (and be rescued by your tax dollars).

Posted by: b | Mar 17 2008 20:36 utc | 28

In the “real” world, in the states, here on the ground where average folk drone about their day, JP’s BS buyout is barely heard above the din of illusory static offered as news by an almost totally corrupted media.
Maybe financial collapse is what Americans need to shake us from our apathy, considering two fraudulent wars, sham elections, torturing, spying, lying and, on top of all that, a president happy to do a little song and dance for his pals about Scooter running from the prosecutor, hasn’t been enough.
Though b does an amazing job of translating economic jargon, helping us navigate through the economic weeds, I think in the end it’s very simple, and can be explained using one word: GREED.
And when it comes to greed, we can’t heap all the blame on the soulless opportunists manipulating complex economic systems to obscenely line their apparently bottomless pockets without any second thought about the human misery and suffering they’re creating. No, I’m afraid America–as in, we, the people–need to come to terms with our own complicity, so we can see how much real, difficult change is going to be required of us.
Then, we need to start preparing our neighborhoods and communities for worst case scenarios, maybe not far from the “seemingly” over the top dystopia of Alex Jones.

Posted by: Lizard | Mar 17 2008 20:59 utc | 29

Bear got it first only because they have long been the sector’s nastiest pricks. Lehman are the second biggest bunch of nasty hateful pricks, so their number is up, but they might survive. We can’t believe a word when Lehman claims it’s in good shape, of course, but Lehman is one of the 20 primary dealers covered by the new lending facility, so now they get wiggle room to ward off a run on suspect repos. That has been the immediate threat and it’s been averted, for now. However, one very cool unintended consequence is that the Fed’s new, broader range of collateral will boost the value of shitty MBSs and everybody’s brokers will see that and say, Oh boy, now’s the time for margin calls, let’s grab that crap collateral and dump it now.’ That’s what killed Carlyle Capital, but it needn’t kill Lehman. It will naturally be costly and painful, like damage short of massive organ failure, as the torturers would say.

Posted by: …—… | Mar 17 2008 21:58 utc | 30

Here’s an interesting comment over on Kevin Drum’s Political Animal, I mean washingtonmonthly.com blog.

… someone is doing something which we don’t know about.
The someone is a collection of large financial institutions with low questionable loan exposure. The something is that they are creating a crisis by refusing to lend although they could. The reason for this is that they intend to acquire distressed assets at pennies on the dollar. The method is to first expand credit greatly; then to reduce their own exposure; and finally to reduce credit to create a crisis.

Back at the end of last year, Goldman Sachs was claimed to have negligible exposure to MBSs etc.
Same place that US Treasury Secretary Paulson is from (he was CEO and chairman of Golden Sacks). Coincidence? These guys play for keeps.
Other in-depth comments on that thread as well:

The behavior of serially dumping misrepresented crap was pretty costless for four years, from the beginning of 2003 through the end of 2006, so mortgage originators took a tremendous and undeserved windfall when they sold mortgages for value premia related to true aggregate discount value (they fraudulently stole money from their hoodwinked CDO customers).

Posted by: jonku | Mar 17 2008 22:41 utc | 31

“Now through this world I’ve wandered.
I’ve met lots of different men.
Some rob you with a six gun.
Some with a fountain pen”
Robber-baron time yet? It looks like the Fed is holding things together just long enough for the Shrub to finish his disgraced term. Then…they’ll no longer care. The worse it gets, the better for the party of Hard Drinkin’ Link-kin’. If they can’t control the country, they’re willing to destroy it.

Posted by: Diogenes | Mar 17 2008 22:55 utc | 32

diogenes
….but without the humanity of ‘ramblin’, ‘gamblin’ willie

Posted by: remembereringgiap | Mar 17 2008 23:02 utc | 33

Greenspan realizes he has to get it in writing that he was not such a fool as to misrecognize the 2nd Great Depression, but doesn’t want to get blamed for causing it, so…

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually…

Posted by: Anonymous | Mar 18 2008 2:14 utc | 34

(me above)
…since the end of the second world war…
very cute

Posted by: citizen | Mar 18 2008 2:15 utc | 35

So let me get this straight…
If I run a roundtrip between my business and my wife’s business,
and cook the books, and artificially inflate the assets’ values,
and get vendors to charge me extra for equipment, so we can split
the difference in kickbacks and commissions, then I can write off
the spread as capital depreciation, then fill out a false W1040,
and mail it off with a blue ribbon, and chocolates and roses…
…will the IRS buy out my deadbeat A/R’s, like the Fed funded
JPM’s toilet paper, and DoD made Chalabi the Emperor of Iraq?!
Bernanke said in 2002, before Bush.Con’s “Little War” (GW3):
“I would like to say to Milton and Anna: Regarding the Great
Depression. You’re right, we did it. We’re very sorry. But
thanks to you, we won’t do it again.” He may eat those words.
Ironically, six years later, (as in four score years ago), Say’s
Law again no longer applies, and the Fed’s caught in a liquidity
traps of the banker’s making, a “cratering revaluation of
real wages without any tendency to equilibrium,” and the House of
Morgan is once again buying up equities to stop wholesale panic.
“Yet, many investors began to worry during the weekend.”
NOTICE: All hanging technicians shall leave the scaffold and the
Executioner, on order from the Warden, shall release the trap door.
“Etcetera, etcetera,” as Yul Brinner liked to say.

Posted by: Smoot Hawley | Mar 18 2008 2:16 utc | 36

Regarding jonku’s post #31, thank you for the good link to Kevin Drum’s site and the excellent comments that followed there.
And what I describe below reminds me of another aspect in what Dan of Steele said in his post #6 above: “it really is a beautiful system for the financiers…”
In a later post today on ‘The Washington Monthly’ blog by Kevin Drum, I find this comment by Diana as a perfect example in microcosm of the “Corporate Fascism” that plagues Americans today. This “system” of corporatism has evolved into a malignant cancer, spreading rapidly, eating not only our bodies but also our souls. This cancer does not stop at the water’s edge.

A little-known tidbit about the regulation of these risky investments:
“As a result of pooling assets and issuing MBS [mortgage-backed securities], the SPV [special purpose vehicles] structures described above arguably fit under the broad definition of “investment company” as defined in the Investment Company Act of 1940 and, hence, would be subject to the extensive requirements of the Act. These requirements are widely viewed, including by SEC staff” [wonder how much that cost the lobbyists]”, as being inconsistent with the normal operations of SPVs and, hence, virtually all SPVs have been structured so as to enjoy an exemption from the Act. The primary exemption relied upon is Rule 3a-7 of the Investment Company Act, which provides an exemption from the Act if an SPV issues fixed-income securities that, at the time of sale, receive one of the four highest categories of investment quality from a “nationally recognized rating agency” (typically S&P, Moody’s or Fitch). Pursuit of this exemption is one reason why it is important for an SPV and the securities it issues, to be structured so that they receive the necessary investment ratings.” (from a paper by Jennifer Bethel on legal risk of these securities).
In other words, get an AAA rating slapped on one of these things and you are automatically exempt from regulatory oversight.
And the rating agencies were giving away AAA ratings in exchange for — more business.
Any wonder things got out of hand?
Posted by: Diana on March 17, 2008 at 4:23 PM

Posted by: Rick | Mar 18 2008 2:32 utc | 37

R.L.- You meant to say, “We’re in the Bear Stearns now.”
I had a friend named Ramblin’ Joe (Lewis)
Who used to steal, gamble and ho’
He thought he was the smartest guy in town
But I found out last Monday
That Joe got locked up Sunday
They’ve got him in the jailhouse way down town
He’s in the Bear Stears now,
He’s in the Bear Stears now…
I told him once or twice quit playin’ cards and shootin’ ice
He’s in the Bear Stears now,
He’s in the Bear Stears now…

Posted by: Terrence Micheals | Mar 18 2008 2:45 utc | 38

Tiny revolution blog has some interesting things to add…

I strongly suspect we’re seeing a replay of what happened with the S&L crisis in the eighties. The business details aren’t exactly the same, but the political dynamics are.

Posted by: Uncle $cam | Mar 18 2008 11:34 utc | 39

Charting The Banking Crisis – A Boomerang Demo

Posted by: Anonymous | Mar 18 2008 13:16 utc | 40

CA Fitts links a Greenspan take on the “Financial Crisis” & translates it into English:
Catherine’s translation here:
Our efforts to centralize ownership and governance of global resources through the financial system have been successful. Now that this phase is complete, there were numerous people and institutions who were important to grow and manage the bubble, who are no longer needed. We are letting them go.
We are proceeding to consolidate control and implement new regulation through the international banking and monetary system. These decisions have been made and you will support them. If you want to be part of our team and enjoy any of the winnings, you will affirm that sweeping changes in global financial governance are in the interests of “free, healthy markets” which create “real wealth.”
Capiche? link
I suspect their plans are already drawn up as I caught a few mins. of Lou Dobbs last night & one of the clowns he had on said something similar – clearly our institutions aren’t sufficient for managing such complex global transactions…

Posted by: jj | Mar 18 2008 20:23 utc | 41

New Schrute Buck hits new low, while former Wizard says our bubble economy wasn’t his fault Remember when the Wizard of Oz took off in his balloon and left Dorothy behind? At least she could tap her magic slippers together and wake up from her dream. We don’t have any magic slippers, and we seem to be trapped in an economic nightmare with no end in sight.

Posted by: Madison Guy | Mar 18 2008 20:49 utc | 42

Steve Randy Waldman has a brilliant post at Interfluidity on JPM’s takeover of Bear. The SEC is investigating.

Posted by: Wolf DeVoon | Mar 19 2008 7:35 utc | 43

Kunstler (for insomniacs) has a curious new set of predictions:

Despite the heroics around the fate of Bear Stearns, it looks like the financial system is tottering anyway. Perhaps the last trick left in the rescue bag will be the 100-basis-point drop in the Fed rate rumored to be announced tomorrow. It won’t help any of the big banks, since their problem is holding liabilities in excess of assets. Almost certainly it would crater the US Dollar.
The next thing in store for America, in my opinion, will be a rather new surprise: oil-and-gasoline shortages. While frightened money pours into the oil futures markets, driving the price up, strange behavior will start brewing in the actual physical allocation process. Imports of oil and gas to the US may not be as reliable as it had been when America seemed to be a solvent nation. The exporters may be changing their terms of doing business with us — and that’s nearly two-thirds of all the oil we need. The public would probably suck up oil price increases indefinitely, but shortages are going to be something else. A real freak out.

.
He’s probably right so much as that some black swan events associated with the rollback of empire will begin to take effect in unpredictable ways. And Americans are faced with prima-fascia evidence that they’re not so exceptional after all.

Posted by: anna missed | Mar 19 2008 9:42 utc | 44

Interesting point here about Bear Stearns: 30% of the stock was owned by its employees.
Schadenfreude? No. I think this reveals that we are sicker than assumed. It means the problem isn’t just greed and self interest. The problem isn’t rip-off artists even. Our problem is that we have absorbed MBA-think, but only enough to make us believe that rubes are always somewhere else, someone else.
I think I’ve finally got an operational definition for a history term that has long confused me…
Post-colonialism: a belief that pitting nation against nation is under-ambitious.

Posted by: citizen | Mar 19 2008 18:07 utc | 45

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