Sunday, March 16, 2008

And just like that...

It's gone.

It is a shocker. Even more shocking is the unprecedented moves the Federal Reserve is making. While Bear Stearns has legally been bought by JP Morgan(for $2 a share mind you, the stock is trading at $30, and the deal was approved by the US Government and the Federal Reserve in a matter of hours - which probably means the bank was going to have to declare bankruptcy on Monday), the Federal Reserve has now taken over all of the banks trading positions(up to $30 billion). This is the similar to how the UK bailed out Northern Rock - through nationalization. The Federal Reserve has effectively nationalized Bear Stearns. Bear Stearns was the 5th largest investment bank in America.

At least the Fed is getting a clue about what kind of situation we are in - something is systemically wrong with the United States' modern banking system. An outright collapse could have caused huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.

Greenspan's Thoughts


Blogger John Liberty said...

So the question is: if Bear Stearns screwed up big time - as it did - with huge leverage, reckless investments, lousy risk management and massive underestimation of liquidity risk why should the US taxpayer bail out this firm and its shareholders? First fully wipe out those shareholders, then fire all the senior management and have the government take over such a bankrupt institution before a penny of public money is wasted in bailing it out. Instead now the use of public money to bail out financial institutions is spreading from banking ones to non banking ones. The Fed should at least give a clear and public explanation of why such extremely exceptional - and almost never used - intervention was justified.

Unless public money is used on a very temporary basis to achieve an orderly wind-down or merger of Bear Stearns this is another case where profits are privatized and losses are socialized. By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification.

12:47 AM  
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2:41 PM  

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