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Bear Sterns Bailout and My Outrage
By Charles Zentay March 25, 2008
I have been a longtime critic of the
Fed, but the latest moves by the Fed are beyond even my most cynical
estimations. Bear Stearns was one of the most
aggressive banks in facilitating the excessive lending that helped
create the mortgage mess. This
mortgage mess is impoverishing millions of Americans and affecting
us all through a lower dollar and higher gasoline prices. Bear Stearns bet heavily on the
mortgage market, made billions in profits on the way up, and
rewarded employees and executives with hundreds of millions of
dollars in bonuses. However,
once the bubble burst, Bear Stearns was proven to have been too
aggressive in pushing mortgages.
The value of its assets fell so far that they could not cover
the company’s liabilities. Bear
Stearns was bankrupt, and no one wanted to buy them. The bankruptcy of risky and
irresponsible companies is an important part of capitalism.
This creative destruction eliminates waste and fraud and
ensures appropriate amounts of risk taking during the next business
cycle. For companies and individuals,
insolvency leads to bankruptcy. However,
in the banking sector, the insolvency of a major bank can lead to a
domino effect, with other banks, which are owed money by failing
bank, falling into bankruptcy.
As a result, insolvent banks are nationalized, as happened to
Northern Rock in England recently or many S&Ls in the U.S. in
the 1980s. The
government prevents a domino effect by guaranteeing payment to
counterparties. Why didn’t the U.S. government
simply nationalize and wind down Bear Stearns?
If the government is in the bailout business, Hillary Clinton
is now asking, why can’t the U.S. government bailout homeowners,
too? Of course, the Fed claims there was
no bailout, but the facts are obvious.
Bear Stearns shareholders, holding a company that no one
wanted to buy, received over $2 billion.
JPMorgan, the buyer, received all the most valuable assets of
Bear Stearns, which may be worth tens of billions, if not more, in
the future. And we, the
people of the United States of America? According to BusinessWeek, “In
essence, the New York Fed [essentially, the government and therefore
the people] will create a special company that will hold the $30
billion in Bear assets. It
will lend the unit $29 billion at 3.25% interest and JPMorgan itself
will lend the unit $1 billion. When the assets are liquidated,
JPMorgan won't get back its $1 billion until after the Fed has been
fully repaid with interest. And
if there's any money left over from the liquidation after all the
loans have been repaid, the Fed will get to keep it.”
In other words, the risky, nearly worthless $30 billion in
assets that were bogging down Bear Stearns have been handed to you
and me. If somehow
these securities end up being worth something we profit.
If not, which is what the market is currently saying, all of
the liability (except for $1 billion) will be borne by us, the
people. And worse
still, this portfolio of $30 billion in bonds will not be managed by
the government, but will be managed --- at a high cost --- by one of
the original creators of the type of exotic mortgage products that
helped create this mess in the first place. Why did the government hand all the
upside of Bear Stearns over to JPMorgan without any calm auction
process? Why did the government assume nearly all of the risk?
And what do you think the chances are that Ben Bernanke, upon
leaving the Fed, will get an extremely high-paid job at JPMorgan
(after all, that’s what happened to a lot of the Fed managers who
helped bailout Long-term Capital) [participate in our poll at
fakeben.com]. Please visit fakeben.com and help us
to stop these continued and flagrant abuses of our system. The Fed must be stopped before it
totally destroys the dollar and impoverishes hardworking Americans
through policies that encourage too much debt, not enough savings,
and banking excesses.
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