“…this could also happen. the Fed and the federal gov by way of freddie/fannie take all these loans onto their books. the crisis adverts. Home prices go up and the federal gov (the taxpayers) makes a killing in the real estate business….”
unseen on March 20, 2008 at 12:53 PM

I had seen this as a rather plausible option also…?

“…What the “Fed” should have done is guarantee Fannie and Freddie’s paper directly. This action would have supported the middleclass mortgagee’s directly….”
J_Gocht on March 20, 2008 at 9:39 AM

unseen, given the “Fed” is the arbiter of last resort in any case. Why isn’t this sort of direct intervention a completely plausible scenario?

My best thought would be…this sort of direct action would be a wholesale departure from the status quo and the presently accepted way of doing business in our “supposedly orderly” capitalistic business, financial and third party markets?

But; what do I know…?
I can certainly visualize the calamity you define.

The new fed window for investment banks (wtf?), the Primary Dealer Credit Facility, is problematic.

This is the real story. The Fed – owned and controlled by retail banks that share in its fortunes and misfortunes – has opened a new lending window to INVESTMENT BANKS that do not own or control shares in the Federal Reserve System and therefore have almost no exposure to its risk.

This is a big problem. The Fed isn’t stupid. They’re really not going to risk everything to bail out some investment banks, but they are doing it because their projections of investment bank failures are a threat to Fed member retail banks.

citibank will be the next test of the FED. It is too big to fail and also too big to bailout a.ka. JPM/Stearns deal. It will need massive infusions of capital possibly by SWFunds. Wells fargo looks like a good buy also at these levels. There will be another test soon. Mer traded 72,000 puts yesterday of way out of the money options. Someone does not place that large of bet on a whim. that is 7.2 million shares with a strike price about $20.00 below the present price. So basically someone is betting that MER will be cut in half within the next month. GS,LEH both came out smelling like roses from last qrt. We are in the bottom of the seventh. If we can hold out a little longer we should be ok with only a recession to show for it. That would be the best outcome.

unseen on March 20, 2008 at 12:42 PM

Interesting. I hope the deal gets done. A sweetener for equity holders might help some, though not for the employees who are losing their jobs and retirement nest egg. I feel bad for them and know of a few, but the Fed can point to them as evidence that they aren’t creating a moral hazard.

I agree that JPM is a well run company. I remember when Sandy Weil fired Jamie Dimon thinking that it was a really bad move for Citi. No doubt Citi shareholders wish Jamie had taken over the company rather than Chuck Prince.

GS is probably still a good buy at these prices and maybe USB, but I’m staying away from all the financials for now.

yes that could happen also. however the actions of the FED to regulate the industry would tend to make that possiblity less. this could also happen. the Fed and the federal gov by way of freddie/fannie take all these loans onto their books. the crisis adverts. Home prices go up and the federal gov (the taxpayers) makes a killing in the real estate business.

you can not outlaw fear and greed. Bubbles will happen as well as crashes. This was true before the FED also. It is not the printing of money or low rates that cause bubbles it is the human emotion of greed. the trick of a good government is to dampen both emotions so the bubbles and crashes are small, orderly and manageable and do not spill over into other faucets of the economy. It was not the low inerest rates or the printing of money that is causing the bubble to form in gold and oil it is the human emotion of fear. Once the emotion is gone oil and gold will crash (it may already be crashing) These crashes will cause a large destruction of wealth should the fed gov bail out those investors? No because one there is little chance of the crash spilling over to the broder economy and two cheaper commodites will help not hurt the economy. All crahses and all bubbles are not the same and should not be treated the same.

Once the crisis is passed i would not be surprised to see JPM increase their offer to maybe .25 shares instead of the .05 shares it is now offering. It will still be an all share deal IMO. So that would put the bid to around $10.00/share. this way the big shareholders can buy the shares at the $5 level see a double on their invesment and get out of the shares without a major loss. the Fed wins, the country wins and of course the shareholders win. JPM is a great buy right now as long as the markets stay solvent.

LimeyGeek on March 20, 2008 at 12:05 PM

unseen is dramatic. Certainly a story like that could happen. Let me try tell a story based on the Fed acting.

The Bear Stearns buyout tells other banks if the Fed isn’t willing to let Bear go under then they should expect their operations to get help if needed. They continue on their merry way waiting for housing prices to stabilize. When they do they go right back to their free lending ways encouraged by the Fed’s continued low interest rates.

More loans are made, this time with slightly more scrutiny of borrowers. Eventually people’s skepticism about these markets pass and lenders get foolish again. Another housing bubble takes place. Defaults rise again and lenders are back into the same situation they were in 2007-08 only this time there’s even more bad debt.

The lenders and financiers assume the Fed will save them. Only the Fed doesn’t have enough cash to do it. It tries to bailout one, but others pop up. The Fed runs out of money and it’s interest rate tools are shot. It’s only resort is to run the printing presses night and day to inflate the currency for needed cash. The dollar really tanks. Countries stop pegging their currency to the dollar, and the Middle East stops selling oil in dollars.

That scenario is grim, dramatic, and plausible. Ultimately taking action is about best guesses within a short amount of time. I hope things work out.

but the deal was done before the opening ASIAN bell. why did the Fed want to get the deal done before the Asian stock markets opened? Because a Bear Streans failure would have had worldwide ramifications and sparked a massive stock market crash.

unseen on March 20, 2008 at 12:18 PM

Good point. Lucky BSC’s problems started on a Friday. It is interesting to watch the stock be bid up now as bond holders and equity holders get ready to fight it out over the deal. Either way JPM gets the Madison Avenue building which is worth about $1 billion.

dedalus on March 20, 2008 at 11:50 AM

but the deal was done before the opening ASIAN bell. why did the Fed want to get the deal done before the Asian stock markets opened? Because a Bear Streans failure would have had worldwide ramifications and sparked a massive stock market crash.

the Fed chairman was a student of the depression its causes, its effect. He sees the same scenrio unfolding. If he didn’t he would not have done what he did. the federal gov can not agree on anything yet they passed a 150billion rebate package in record time. Dems and REps came together to do this. the same people that fight over everything. They came together in record time to pass a bill that the majority of american think is stupid. Ask yourself why they did this. They see the same thing as the Fed chairman. the Tresury sec and the fed chairman seized Bear streans assets. Again an 85 year old company with billions of assets was seized in 2 days and sold off for 250million. Ask yourself why. this is not dramtic. the world markets have sold off for the last six months over this fear. trillions in wealth have evaporated as those that understand the ramifications flee the risk of total collapse. Again ask yourself why the smart money is dumping stocks,fleeing to treasury bills with very low rates of return during times of record profits in the underlying companies. Ask why gold and oil were surging before Bear streans buy out and now are selling off because the crisis has been avoided. Why the world was fleeing the dollar? Why the oil shieks were pumping billions of their money into our economy to prop up the banking system and losing money in the deal. The answers to these questions give a very clear big picture of the problems.

unseen on March 20, 2008 at 11:59 AM

Your view of economics tends to the dramatic. Makes for good conversation though :)

Absurd? You must not being paying attention to the markets.

What happens if we just let Bear Stearns slide?
Just from this statement you are missing the big picture. think of our financial markets as a row of dominios. When the first falls the rest follows. If Bear streans would have failed without government intervention we could have expected a run on all investment banks, goldman saks, Merille Lynch, Lehman brothers. the panic would have spread across the pond and the UK and EU banking systems would have similar runs like Nothern Rock. Asian and china’s banks would have failed also. with each failure the amount of capital to fund day to day operations of companies would dry up. companies would no longer be able to pay thier accounts payable with short term borrowing at the same time that their long term investments would have lost millions, that means payrolls would not have been met, those americans and companies living pay check to pay check would have missed payments on their overleveraged lifestyles. Another wave of credit defaults would cause more runs on the banks, more bank failures and more job losses. All the banks are FDIC insured so the federal government would be on the hook for all losses. Yet the speed of the federal government’s response would make Katrina look like a well run operation. It would be months before the gov was able to make up thoses losses, and where would they get the money to make up thoses loses, the rest of the world would be having their own problems so we could not borrow our way out of the problem. The government would start seizing assets like gold from individuals like FDR did in the 1930′s. All hard assets would be seized including oil. Credit cards would be worhtless and no longer accepted by merchants. All because the first domino was allowed to fall. You think this is sci-fi. this happened in 1929. If it happened once it can and will happen again. the difference between 1929 and 2008is that in 1929 the taxpayers where not on the hook for the depsoits. the government was not in debt 9 TRILLION, we did not have social security, welfare, unemployment insurance, medicare and all the other government programs that limits the governments ability to act in a deflationary cycle.

Add into this mix the fact that Bear streans was a market maker for a large % of the US and world stocks and you have not only a run on the banks but a run on the markets.

Maybe if people understood all this stuff we would have less people shouting “let them cake” So a few individuals get “saved” they can be prosecuted later after the crisis.

You still don’t think this could happen? Ask yourself this. Why did obsama attack the world trade center? It was this reason this negative feedback loop that Bin Laden wanted to set in motion. He almost succeed if not for the quick actions of the FED dropping the FEd rates to 1% the federal government pumping billions into the markets. I didn’t hear any complaints on 9/12 when the fed gov did the same thing because of an external threat. why is an internal threat treated different. Quit listening to the class warfare rethoric of the MSM. We are in a crapload of trouble and things can get alot worse. It took 14 years and a world war to get us out of the last deflationay cycle. I would rather live those 14 years in the land of plenty instead of in the land of sorrow. If it takes a couple hundred billion to save us from that possibility I say do it. we spend more on the interest for debt than that.

dedalus on March 20, 2008 at 11:50 AM

Exactly

I’m amazed they got JP Morgan to do all their due diligence in a weekend.

You can bet that didn’t happen. That is where the Fed stepped in by providing some $30B in guarantees to Jamie Dimon and JPM if they had the deal done in time for Monday’s opening bell.

I think it’s making the best of a bad situation. The Fed and Treasury weren’t willing to risk a bad market reaction to the slow death of Bear Stearns. They moved in to keep the markets liquid.

I’m concerned about the precedent and potential moral hazard. But to be honest I don’t know if I would have done anything differently. Last week was a wild few days where anything (or nothing) could have happened.

seanhackbarth on March 20, 2008 at 10:46 AM

I agree with your observations about the Fed needing to step in but also avoid moral hazard. I think they got it about right by making sure that the counter-party obligations of Bear were not jeapordized and ensuring that Bear shareholders were not benefited–and they certainly weren’t.

seanhackbarth on March 20, 2008 at 11:37 AM

Agreed. I actually do appreciate the contrasting view to my own – the desire to forestall greater damage.

The government has a phenomenal pile of money it can throw at problems, and it is easy to be supportive of their decision to do so, but at the same time we are supporting decisions that damage a far broader and deeper economic landscape. Our futures.

This, together with my dispute over the constitutionality of the action, form the basis of my objection.

I think the “bet” is going to come around and bite a chunk out of our arse. As Sowell might say – it’ll take longer than most political time-horizons, however.

LimeyGeek on March 20, 2008 at 11:33 AM

I agree had Bear Stearns been allowed to collapse all by itself other firms would have bought the assets. But that takes time. Bankruptcy court isn’t a speedy process. The Fed and Treasury made the judgment that something fast needed to be done. I’m amazed they got JP Morgan to do all their due diligence in a weekend.

So far the government’s bet is playing out. That could change.

“…Congress authorised the power for the Fed to print money. None of these actions are taken lightly. I believe the powers that be truley believe they are charting the right course, regardless of whether that is so. So many of them are set to topple should the wheels come off that believe they are actually trying to do the least harm…”
shuzilla on March 20, 2008 at 10:47 AM

History will be both your judge and jury. Your thought is valid.

I tend to NOT want my entire life savings to be wiped out because of the actions of a few knuckleheads that got greedy

Sure. Neither do I. Such an apocalyptic scenario is absurd, however.

you seem to say that we should spend zero to protect us from financal harm

I am bloody well saying no such thing! I am saying that the government should not be taking my money to prop up private-sector fools.

What happens if we just let Bear Stearns slide? Those same “greedy” people you deride will snap up the company in a firesale and augment their own business. All within the private sector. Over time, investments in that one specific miniscule sector will recover.

Panic, and clamouring for “solutions” from pappy gubmint, are a far greater cause of pain long-term, but certain people do get to feel a short-term glow of satisfaction about having “done something” to “fix” the “crisis”.

Your comity is only exceeded by your intellect.

Did I actually write that?

That way you might give me some slack when I mess up.

“J_Gocht, stop while you’re behind. Paulson is from Goldman Sachs, not Lehmann Brothers.
seanhackbarth on March 20, 2008 at 10:43 AM”

Thanks, seanhackbarth.
A different post infiltrated my mushy noodle. If you allow me the same latitude given Senator McCain in equating Iranian training of al-Qaeda; I have two strikes left?