Tuesday, March 18, 2008
This yammer about the Fed "bailing out" Bear is ridiculous. The Fed handed the loss to the shareholders. Nor are the loans inflationary. The amount of value destroyed for Bear's shareholders offsets any minor inflationary effect. A whole bunch of people were wealthy on Friday, and poor on Monday.
There is major agony amongst the financial class. It's the equivalent of the French Revolution.
I have concluded that we are in economic silly season, because most of the analysis I read doesn't make much sense. I know I owe you an explanation of inflation, but I woke up with the beginnings of a bad cold and I'm going to get as much rest time as possible today. We're fighting deflation, not inflation.
WIth food prices increasing rapidly, and energy prices continuing a sharp up trend, I don't see how inflation is avoided. Not to mention the fed pumping in many dollars probably overvalued relative to what is put up as collateral.
Granted, there are also major deflationary forces that are probably coming to bear. But I see what look like clear inflationary forces too, so think it will be a seesaw.
Therefore interested in your take.
Granted, there are going
Our economic betters get financial deflation as bubbles collapse and strange financial instruments are marked to zero.
While the economic lessers get to pay more for milk, bread and gas.
At some point our economic betters will come to the conclusion that consumers are like a natural resource, you cannot keep on exploiting it without consequence. Consumers must be protected and provided means to increase.
The fed guaranteed the value of $30 billion in assets to get this deal done. Equity holders took losses, but bond holders and counter parties were spared losses and guaranteed 100% return of principal and payment of interest. The bail out was also done against the unprecedented back drop of the fed lending directly to broker dealers (including lending treasuries against assets of questionable value).
The fed has sponsored so much leverage in all parts of the market for so long, they clearly feel they have no choice but to take extreme measures.
Again, growing the aggregate numbers for the sake of it is senseless. I don't see how growth for the sake of growth leads to prosperity. Especially considering the distibution of income trends.
BTW, the $150 billion tax rebate plan IS a bail out also.
Good points. I see deflation for the wealthiest 10% of the population and inflation for remaining 90% of the population. Bad news all around.
The fed guaranteed the value of $30 billion in assets to get this deal done. Equity holders took losses, but bond holders and counter parties were spared losses and guaranteed 100% return of principal and payment of interest.
The people protected were those for whom Bear Sterns was acting as an agent. The stockholders were reamed, and many employees will be out of work. Those whose business decisions brought this about should take the worst of it, but there probably isn't enough of them to get all the skin that has to be taken.
I don't see how growth for the sake of growth leads to prosperity.
That depends what you mean by "growth for the sake of growth." If you mean increased share valuations with no production beneath them, then the benefit is limited. But if it represents actual growth in productive capacity, then there are more goods and services to be bought. And unless those are going into inventory, people are buying them, which means they are satisfying needs and wants and are, presumably, better off--more prosperous.
MAB - the rebates are a stimulus program, but are they a bailout? A bailout usually describes rescue of a certain entity or class of entities.
ALL - My body's response to a cold is quite often to react as if it is countering bubonic plague along with bird flu. Thus colds rarely last more than a day, but they lay me out. I should be back in commission tomorrow.
I do find it ironically just that the financial empire-builders are now having their own depression. That is actually what a professional money guy told me yesterday - that it was a depression.
Anyone with a clue knows the score re " bailing out" the financial crooks & their firms.
Must be serious repercussions for what these two legged animals have heaped on this country.
These crooks will have to be stripped of assets and put out on islands as we should have done long ago to keep the system more honest.
(as all dangerous riminals[separate islands same for those don't want to work to support themselves ])
All will have to be reduced with a return to basic living as the solution.
Hope you feel better and take care.
As of 11/30/07, Bear Steans had $289 billion of short and long term debt. The debt was selling at various discounts to par prior to the fed backstopping J.P. Morgan and the take under. Total equity loss was less than 10 billion (depending on the date used for the stock price). In a bankruptcy, the debt holders would certainly get far less than 100% on the dollar. In a panic, the prices would be unthinkable.
Without the fed's guarantee, Bear's debt would have set marks that would have necessitated the Fed to lower the carrying value of many of the so called AAA assets on its own balance sheet. This would have required margin calls on the TAF, etc. Think cascading defaults.
There is so much leverage in the system, Bear literally was euthanized and assumed by the FED in order to preserve the system.
One for the history books.
As far as I can tell, the Fed is trying to slow down the unwind so that the salvageable companies can be salvaged. As a bonus the survivors get to spend several hard, profitless years dancing on the edge of a knife, an object lesson that would not be learned by simply pushing their reset buttons.
I do not think Bear's customers were such a big concern. If it was simply a matter of keeping the clearing and settlement functions going, couldn't the Fed have simply written a cash loan to keep them going until a buyer was found? Even an outright grant would be less than the rounding error on what they actually did.
Daniel, it is counterparty risk. Bear could not meet its obligations. It was a huge derivatives player, and it was going to fold. The result would have bankrupted a chain of companies.
The Fed's action is said to be "unprecedented", but it really isn't. What the Fed did was to use its power to treat a member of the shadow banking system as if it were a collapsed bank. There was no better solution.
The stability of the banking system is deeply involved now with companies which have a much looser rein than banks. Since the Fed had to cover, the Fed needed to execute the offender.
I said before, we can't afford to bail these guys out. We have to fold them and patch the holes they leave behind. Believe me, this is striking terror in the hearts of the big-time financial world.
Links to this post: