Down The Rabbit Hole: Feds Outline Bear Stearns Collateral
April 3rd, 2008 by Chris KinnanThe key element of the Bear Stearns bailout is a secretive government-backed loan of $29 billion to J.P. Morgan Chase. (It is for $30 billion but JP Morgan is on the hook for the first $1 billion in losses.)
Bear Stearns was clearly bankrupt, but the Federal Reserve’s loan allowed J.P. Morgan Chase to eventually offer $10 a share for the firm. That represents about a $1 billion windfall to Bear Stearns shareholders, who should have been wiped out completely for owning an insolvent investment bank.
- The collateral appears to be mostly mortgage and other real-estate related assets.
- The collateral is not all AAA rated, but includes assets valued all the way down to BBB, which is one notch above “speculative grade.”
- The “majority” of the collateral is already backed by the GSEs. That’s interesting because that part of the portfolio is probably higher quality and there is an implicit government backing of those assets.
- The Federal Reserve is required by accounting rules to report the valuation of the portfolio on an annual basis only.
Why do we care? We’ll keep watching this because it is an insiders’ deal for assets that will probably never be worth $29 billion, and at some point taxpayers may have to write a check.
And, even if this deal works out, it opened the door to the appalling new federal lending window that gives cash directly to other investment banks for impaired assets. More on that to come.
April 3rd, 2008 at 12:30 pm
This is interesting, because the Bear Stearns collapse can be tied directly to credit default swaps, a completely unregulated and opaque market. If the Fed is to be believed, the Bear Stearns deal was necessary to stop a cascading effect that would devastate the banking industry. If the Fed’s telling the truth, then this is yet another argument that regulation of industry is essential to maintaining a healthy economy.
It really paints a picture of what I’ve been saying for some time: the quaint “invisible hand” economic model of Adam Smith (who himself favored government regulation of markets) does not account for the incredible complexity of today’s markets and is an outmoded theory with little practical use.
But what’s worse, it also demonstrates that free-market ideologues in the business world are only “real capitalists” when it suits them. On this score, one of my favorite ironies of the conservative movement is that the Washington Times (one of y’all’s favorite publications, it would appear) has never made a profit and has lost $3 billion since it started publication. The only reason it’s afloat at all is because it’s subsidized heavily by Rev. Moon’s bizarre church. The actual “market” would’ve closed this paper years ago.
April 3rd, 2008 at 12:41 pm
Sickle — favoring the free market isn’t the same thing as being critical of private donations or the groups funded by them. We wholeheartedly support any and every group, profitable or otherwise, that can find a way to support itself without government funds. That means churches (supported by parishioners), charity organizations, advocacy groups on both sides of the political spectrum (though liberal groups are more likely to take government grants), and plenty of political publications, liberal, conservative, and otherwise, which are supported in full or in part by voluntary, private donations.
April 3rd, 2008 at 4:30 pm
“though liberal groups are more likely to take government grants”…not anymore…”faith-based” iniatives anyone? I agree with Sickle…that the Fed stepped in is a reason to believe that this was a serious crisis in the banking industry that need to be headed off.
April 4th, 2008 at 2:24 pm
That wasn’t my argument.
I was merely pointing out that the “free market” would’ve sent the Washington Times packing years and years ago. So when you quote the Washington Times as a legitimate news source, remember that you’re quoting a publication funded by Rev. Moon’s Church, not one that’s made it’s reputation by actually playing in the newspaper market and winning with a good product.
April 4th, 2008 at 8:48 pm
He’s trying to have it both ways I think Sickle by deferentiating on public vs. private money sources. It stinks IMO.
April 6th, 2008 at 8:42 pm
Bear and sterns should be out off buisness .The feds should stay out of it .Their will be more failures befor it ever gets better .
April 7th, 2008 at 2:01 pm
Sickle’s comments are at best ridiculous. Bear Stern’s failure was hardly the result of default swaps. In fact Bear Stern’s collapse came as sub primes went south and accounted for a 60% decrease in hedge profits for the company. The company could not prove hedges against the market drop and posted their first quarter of losses in 83 years of existence. At that point all it took were rumors of liquidity problems to destroy investor confidence and make their capital pool dry up in less than a weeks time. Effectively, they were hurt by overconfident and poor investment decisions with sub-primes and then killed by the self fulfilling speculative market. Now, this buyout being considered a “regulation of the economy” is hardly that, and is in reality a extension of the “too big to fail phenomenon” that punishes creditors severely while attempting to bolster public bank confidence.
April 7th, 2008 at 2:31 pm
Adam Smith’s theory on the invisible hand simply stated the intangible positive externalities attributed with free market ideals and practice. What you might consider “quaint” is in reality been proven by free market economies. Also the notion that people at freedomworks or any economic libertarian do not support
government regulation of economies is euphemistically misguided but in reality
largely ignorant. Collusion, monopolizing, coercion, and fraud are all accountable negative externalities charged by the government to fix and regulate. In modern days, responsible monetary policy has also been included to this list and the Fed’s decision to stem a bank run could easily be justified
as just that. To say this is proof of “modern complicated economic systems” is again, ignorant, given the fact that banking and management is a median of investment rather than a investment end. Perhaps you’d be better arguing the merits of supply and demand while your on such a boisterous roll. I’d suggest you read into the material you’re covering before making such general and foolish claims.
You’re criticism of the Washington Times is wholly
irrelevant given that many papers are reliant on private donations and investment to be sustained. The Sulzberger family owned the NY Times
up until the point it was financially impossible to continue and then opened the paper up to private investment firms to keep solvency. If the Washington Times is getting enough money to operate then it is indeed sustainable under a free market structure. It sure as hell might be a terrible investment but the cost (ever heard of cost/benefit analysis?) for the supplier and donor
must be less then the benefit (even if not monetary) and thus is sustainable. Your argument holds many of the fallacies a psuedo-intellectual liberal puts forth to argue against free market systems while showing no real
academic research or understanding of the problem you’re criticizing. Perhaps education can be an antidote to your ignorance.
April 8th, 2008 at 1:56 am
I think what the Fed did recently with Bear Stearns was indeed an attempt to prevent a general “run” on the baking industry. Great Depression anyone? We need to avoid that kind of outcome at all costs IMO.
“If the Washington Times is getting enough money to operate then it is indeed sustainable under a free market structure.”
This ignores the reality that were it not for apparently one, single, solitary funding source…the Washington Times would have been dead a loooong time ago. The reason you guys don’t mind it hanging around is that it’s generally on your side of the political spectrum, period.
April 8th, 2008 at 10:25 am
Yet another generalization of “you guys” and a typical misunderstanding of the argument being made. I would be considered to be on or near “that side” of the political spectrum (whatever that mean) and i haven’t once read the Washington Times. I’m indifferent to its politics and whether or not it exists. Understand markets and how they’re indifferent to cause or prefference and you’ll start to grasp what I was arguing.