April 02, 2008

So now we know how close we came to a complete and total meltdown of the global financial system as Ben Bernanke spills the beans. So, who's next?


"Too Big to Fail"

You'll be hearing a lot of that in the next weeks, months and years.

Fannie. Freddie. Lehman. Washington Mutual. Countrywide. IndyMac. Ambac. Sallie Mae. FHLB. Pulte. BofA. Wells Fargo. Merrill Lynch. Goldman Sachs. Hell even Home Depot. Too big to fail. Big Daddy Government will be there for you, dishing out trillions to keep the Big Lie alive.

Here's Helicopter Ben today, telling the world what we already knew. The US government will be bailing out stupid companies who made stupid decisions that were run by stupid and corrupt managers because the stupid taxpayers and stupid media do nothing to stop them. Northern Rock and Bear Stearns were nothing. Just wait.

On March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for Chapter 11 bankruptcy the next day unless alternative sources of funds became available.

This news raised difficult questions of public policy. Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company. Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets.

With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The companys failure could also have cast doubt on the financial positions of some of Bear Stearns thousands of counterparties and perhaps of companies with similar businesses.

Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability.

To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy, the Federal Reserve, in close consultation with the Treasury Department, agreed to provide funding to Bear Stearns through JPMorgan Chase. Over the following weekend, JPMorgan Chase agreed to purchase Bear Stearns and assumed Bears financial obligations.

49 comments:

Mammoth said...

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Who's Next???

Washington Mutual, probably.

tangelo mozilo said...

So according to Bubbles Ben, "severly shaken confidence" is something we need to avoid at all cost?

Well, not only dod Bear Sterns make crappy decisions, any company that was a counterparty to Bear Sterns made a crappy when it decided to BE a counterparty to Bear Sterns.

I mean, what do you think is going to appen when you sleep with a hooker with ghonnosyphaherpelaids? You're going to catch it too!

All these big banks are counterparties to one another. Does that mean they will all be saved at my expense.

Tar and Feathers.

Anonymous said...

What recession??!!

The Dow is up baby, all the way up!!!

Wooohooo!!

Break out the Kristal bitches!!

Who? Me worry??

Justill November said...

Thank God the FED was there to save us and the economy!

Thank You Ben and the Fed you guys ROCK!

Anonymous said...

DOPES was right after all. Don't fight the Fed. Who is the ultimate counterparty to whom the risk is diffused away to? You and me. I pay taxes so these thieves can profit.

So what say you Keith? Time to say 'If you can't beat 'em, join 'em?"

mairca izda debol said...

WaMu won't be saved. The only reason BS was saved was because of the $13 TRILLION in outstanding derivatives contracts they were backing. WaMu is nothing more than a giant thrift who will be shut down by the OTS. The FDIC and Fed doesn't even have any regulatory authority over them. Fremont General, one of the worst subprime, liars loan lenders, is on the verge of being shut down by the FDIC. They were based in Clownifornia of course.

Malcolm said...

Uncle Ben :( They sky has fallen, but he's still optimistic about the economy.

http://www.youtube.com/watch?v=t9pGiIn0dOI

BondsOfSteel said...

Eh... FGIC got downgraded to near junk and pertty much nothing happened.

Bear causing a collapse says as much about Bear than the unstablity of the other counterparties. I suspect these counterparies are a lot strong now that they're drinking from the public trough.

happy homeowner in the stix said...

Eh. You kids obviously don't remember the Chrysler bailout, either. Or the RTC, or a couple of others I've forgotten about because of sleep deprivation.

Nothing new to see here, just different names and different industries.

Just wait till Harry Reid et al put together their foreclosure bailout...and yes, that will happen, and deep in your hearts you know it will....

It's Not a Tumor!!! said...

First of all, I am completely enraged by the Bear bailout by tax payers without Congressional consent.

However, I understand and respect the severity of the situation...I don't think anyone wants to see what 17 Trillion in unwinding derititives looks like. It's doubtful that anything less than a global great depression would engulf everyone in its path.

So yes, Dr.Ben saved us for the time being, but I don't see how we're any better off, any more stable or how the US taxpayer isn't going to be completely and utterly bum-fudged by this deal, and the similar deals to come.

So going forward, how are we going to untangle the web that the investment banks have entangled this country in? It's like a massive tumor that has embedded itself in the body's most vital organs. If you rip it out, it kills the host immediately. But if you leave it in, eventually the host will die from the parasite devouring all the vital resources.

So how do we separate the host from the tumor?

It's Not a Tumor!!! said...

First of all, I am completely enraged by the Bear bailout by tax payers without Congressional consent.

However, I understand and respect the severity of the situation...I don't think anyone wants to see what 17 Trillion in unwinding derititives looks like. It's doubtful that anything less than a global great depression would engulf everyone in its path.

So yes, Dr.Ben saved us for the time being, but I don't see how we're any better off, any more stable or how the US taxpayer isn't going to be completely and utterly bum-fudged by this deal, and the similar deals to come.

So going forward, how are we going to untangle the web that the investment banks have entangled this country in? It's like a massive tumor that has embedded itself in the body's most vital organs. If you rip it out, it kills the host immediately. But if you leave it in, eventually the host will die from the parasite devouring all the vital resources.

So how do we separate the host from the tumor?

robert said...

mairca izda debol said...
“ The FDIC and Fed doesn't even have any regulatory authority over them.”

The Fed didn’t have the authority to bail out Bear Sterns. At least not until the weekend of the implosion.

Toby said...

What bailout! Bear Sterns investors lost 90% of their ownership. Employess lost their jobs. Bond holders were covered but they would have made out OK anyway in a bankruptcy.

The Feds actions were about stopping a domino effect with Bear's counterparties.

Watch the bloodbath in NY over the next few months as thousands lose their jobs and give up their condos.

Anonymous said...

counter party(s)? That can only mean the big bad derivatives monster in the basement was about to collapse.

Freeze this system with a government bankruptcy re org or watch the entire world go into a prolonged dark age.

Hitler anyone?

Anonymous said...

BEAR STEARNS IS NOT A BAILOUT. That is, the Government isn't handing $30 billion to either Bear Stearns or JP Morgan. This effort has not cost taxpayers anything so far.

The $30 billion involved in the JP Morgan buy-out of Bear Stearns is NOT a bail-out - it is a non-resource loan (think: loan guarantee) provided by the Federal Reserve system to JP Morgan, in order to induce JP Morgan to take over Bear Stearns, by limiting the downside risks to the Bear Stearns assets that JPM is buying. The Federal Reserve is loaning $30 billion in non-recourse debt against certain Bear Stearns assets, so that if the underlying debtor-counterparty (i.e. homeowner with mortgage) doesn't pay, then the Fed will be left holding that shortfall. This makes it less risky for JP Morgan to buy Bear Stearns.

Now, loan guarantees and non-recourse debt happen everyday in the normal course of business between private parties, and they are not free. It is insurance, and it costs money. The guarantor is accepting risk. So, one could say that there has been SOME bailout, in that there is value to the Federal Reserve's loan to JP Morgan, and I've seen nothing that indicates what JP Morgan actually PAID for that loan in addition to pledging collateral. There might very well have been amounts paid to the Fed in exchange for the loan. Scenario: JPM/BS pledged $40 billion of assets in exchange for a $30 billion loan, and paid for it in the structuring.

Bear Stearns' shareholders have lost about $100 billion in nominal enterprise value over the last year or so, so there isn't a bailout of those investors.

Another relevant point: the Federal Reserve system [wikipedia.org] is not a true U.S. governmental entity, so I'm not sure whether the $30 billion would be a true bailout in any event.

Summary: JP Morgan bought Bear Stearns in a private takeover, and the Federal Reserve system guaranteed the performance of $30 billion in notional debt. This will actually only cost the Federal Reserve the amount that mortgagors (homeowners) don't pay on their mortgage, less recoveries thru foreclosure and similar. Actual cost, if any, will be much smaller - 5-10% (?) of the $30bn.

-Steve Hamlin

keith said...

It's been written that Bernanke favors the Scandanavian model where the bank is bailed out, the shareholders are wiped out, the employees lose their jobs, the skeleton is sold off or wound down, but the accounts are protected

And that's the way it's gonna be. Meanwhile, if you hold bank stocks, you're gonna get killed

Mammoth said...

Clarification – what I meant was that WaMu will probably be the next financial institution down the tubes and no, the Fed will not come to their rescue.

Recently I have posted here on HP about an acquaintance who is a manager at WaMu. Guy just bought a used boat for $25K and is pouring money into it left and right…$250 for this, $500 for that.

And it’s gonna cost a pretty penny just to feed that thing gas as well!

Ran into this guy at a party last Saturday night. Was sitting at the table discussing the economy with a friend, when our acquaintance walks into the room and asked what we were talking about. When we told him, he said, “oh, you guys are talking about boring stuff.”

Don’t worry, be happy, right? Anybody remember the story about the grasshopper and the ant?

When the bank closes its doors and he loses his job, then gets his house foreclosed on, at least he can go live on his boat.

-Mammoth

Buzz Saw said...

Next up more congressional stimulus. I think they plan to pay grifters to buy foreclosires to bailout billionaire banksters.

everyday HPer said...

Hey, Keefer.

You’re missing the mother of both Christianity and Islam in your ‘You adhere to:’ pole.

It is called “Judaism”

A religion old enough and popular enough that it deserves to be added.

Without it, your pole has zero integrity

The Bruiser said...

Interconnected systems are supposed to be more stable than independently-operated systems. BSC would have brought the whole system down not because the entity itself failed, but because the cascade of failures on the derivatives side would have overloaded the remaining players. But whose fault is that? Who let them get this big? If they are too big today, why can't Mr. Market Adjuster (aka The Fed) order the breakup of these huge firms so that our Free Market Deity can decide who is permitted to fail and who is permitted to live?

Anonymous said...

I think Keith has the Scandinavian model half right. The other half is that no bad deed shall go unpunished...all participants get fired, all shareholders et al get wiped out & laws are put in place to make sure the same thing NEVER happens again. That's not what the Fed or Treasury clowns are proposing though......

Anonymous said...

BWA HA HA HA HA HA

Bailout is a done deal.

http://money.cnn.com/2008/04/02/
news/economy/housing_bipartisan_draft/
index.htm?postversion=2008040217

Better enjoy that rental, you'll be there for a long time.

Oh an thanks for the extra tax break renters. I appreciate it, I really do.

Owner Earnings said...

That says more tax payer bailouts to come.

It's going to make it very difficult environment to invest in. As if it weren't already.

How can the dollar hold up? Somehow some way I expect that it will.

Fred said...

Toby,
It is a bailout - 30 billion in taxpayer money at risk, loss of some portion of this is certain. No one is saying that BS did not lose money. However, they raked TONS of profit, paid FAT salaries, etc on the way up while they completely ignored all signs of risk (they damn well knew what would happen on the downside and did not do a goddamn thing)

Steve - 10% of 30 billion is still 3B to taxpayers - how can you not call this a bailout? Moreover, all you will hear now is "if we have 30B for BS, we can certainly rescue X, fill in the blank."

if you want to rescue BS, I want an agreement of repayment of future gains (not back to huge salaries and great annual bonuses - start the banker party again!)

Anonymous said...

Hey HP'ers. the Pig Book is out for 2008. Let's vote all those crooks out of office:

CAGW’s 2008 Pig Book Digs Up $17.2 Billion in Pork

Washington, D.C. - Citizens Against Government Waste (CAGW) today released the 2008 Congressional Pig Book, the latest installment in an 18-year exposé of pork-barrel spending.

“When Congress adopted earmark reforms last year, there was hope that the number and cost of earmarks would be cut in half. By any measure, that has not occurred,” said CAGW President Tom Schatz.

In fiscal year 2008, Congress stuffed 11,610 projects (the second highest total ever) worth $17.2 billion into the 12 appropriations bills. That is a 337 percent increase over the 2,658 projects in fiscal year 2007, and a 30 percent increase over the $13.2 billion total in fiscal year 2007. Alaska led the nation with $556 in pork per capita ($380 million total), followed by Hawaii with $221 ($283 million) and North Dakota with $208 ($133 million). CAGW has identified $271 billion in total pork since 1991.

For the first time, the names of members of Congress were added to the projects. The top three porkers were members of the Senate Appropriations Committee, beginning with Ranking Member Thad Cochran (R-Miss.) with $892 million; Senator Ted Stevens (R-Alaska) with $469 million; and Senator Richard Shelby (R-Ala.) with $465 million.

The Pig Book Summary profiles the most egregious examples, breaks down pork per capita by state, and presents the annual Oinker Awards. All 11,610 projects are listed in a searchable database on CAGW’s website www.cagw.org. Examples of pork in the 2008 Pig Book include:

* $3 million for The First Tee;
* $1,950,000 for the Charles B. Rangel Center for Public Service;
* $460,752 for hops research;
* $211,509 for olive fruit fly research in Paris, France;
* $196,000 for the renovation and transformation of the historic Post Office in Las Vegas;
* $188,000 for the Lobster Institute in Maine; and
* $148,950 for the Montana Sheep Institute.

“Americans do not send their hard-earned tax dollars to Washington so that Sen. Daniel Inouye can bring home $173 million in defense pork and receive the Pacific Fleeced Award or get sapped by $4.8 million going to wood utilization research, on which the government has spent $91 million since 1985,” concluded Schatz.

Anonymous said...

On the bright side, the government is looking for former mortgage lenders to inspect bank books and look into mortgage fraud. Talk about the fox guarding the henhouse.

mairca izda debol said...


The Fed didn’t have the authority to bail out Bear Sterns. At least not until the weekend of the implosion.


The Fed did have the authority and it wasn't a bailout when the shareholders nearly got wiped out. Who was bailed out?

WaMu is not much more than New Century. You saw how much the Fed did to help them. They're basically the same thing except WaMu has some retail branches to take deposits. Fremont General is going down. Bank United is going down. They are only worried about disruptions to the financial system. They know they can't save everyone.

Anonymous said...

according to GEAB global europe anticipation bulletin www.leap2020.eu/GEAB predicts that the whole thing is going to tank by the end of September 2008. Very good reading. Noriel Robini says that the commerical real estate is going to start tanking and that is going to be the lid on the coffin. I see the mail, and the stuff that is for sale is unbelievable. I have never seen mail like this. People are trying to unload multi million dollar properties like they are condo's in Florida. Land. Apartment complexes 20 million dollars. This stuff never came through the mail like this before and now everyday someone is trying to unload a multi million dollar building, home, land and vineyards. Even a few failed mortgage loan companies are trying to unload real estate. I don't know who is next but Mr. Robini suggest a few. I say get ready to batten down the hatches. We are going to have WW3 right here in the states.

Anonymous said...

When the bank closes its doors and he loses his job, then gets his house foreclosed on, at least he can go live on his boat.
----------------------------

he will probably be as clueless as that OC couple that was profiled in a article that Keith linked to recently. When he gets pink slipped he will likely go into the mortgage broker business.... and downsize his boat (if I knew enough about boats i would insert a corvette -> suburban boat analogy)...

i've had it said...

I don't believe a word of what Ben and Paulson say. Ben doesn't know anything about financial markets...he's a damn academic who only knows what he reads in books. Paulson and his cronies convinced him to bail out their Street buddies, telling Ben that we would go into a global disaster if Bear failed. I don't believe it one bit. So Bear fails...and a lot of people lose money. Big deal. Is it any more money than what the American people are going to lose bailing out these asswipes? And even if it were, so what. Companies fail all the time; let this be a lesson to them. Unfortunately, Ben blinked and Wall Street won: now they can go on doing whatever they want, knowing that the govt. will bail them out if it ever gets too severe. We are screwed because of this.

We should have let Bear fail. It may have had some short term implications but by no means would there have been a catastrophic failure. There is no way one medium company can bring down the world's financial system. As for the trillions of dollars supposedly at stake...I don't believe that either. There is something about those contracts we're not being told; something about how they're constructed and the real potential for loss. 17 trillion at stake for one company? That's bigger than the U.S. GDP! Now think about all those other companies and the trillions they have. It just doesn't make sense at all. All these trillions really are not at stake. I don't know the nature of these contracts but if you add up all the trillions it would be far greater than the world's GDP, and that's just not possible. Nope, we've been had, once again, and got conned into the bailout.

We have now condoned the moral hazard forever. Going forward, Wall Street will act with reckless abandon. If you don't believe me, then listen to Jimmy Rogers...he says the same thing.

Anonymous said...

burn, baby, burn.
financial helter skelter. bring it on.

Anonymous said...

But bondholders are made whole? F-that I say.

Anonymous said...

As far as financial institutions go, I'd say that Bank of America or Chase will be the next one to bite the dust. For some reason no one likes BOA, and Chase has a ton of these derivatives on their books. Only makes sense that the biggest holder of derivatives would go under anytime soon. Quite frankly, the value of the whole derivatives market should be $0.00. Can you put a derivative on a plate? Is it a real asset? No. Seems like ever since these derivatives started popping up we've had higher prices on everything. Maybe if they blow up, then gas will go back down to $.75 - 1.00 a gallon and gold will fall down to $300 per troy oz. That's my belief. Prices of everything and the stock market drop far below their peak price, like around maybe 10 - 30% of their peak price.

At least you'll have the road to yourself, no more of them F-350s with Realtors stuck to cellphones riding on your butt.

snapping turtle said...

DOW 17,000 by the end of the year. The banks and big hedge funds have been told not to worry. Any "liquidity" they need will be there.

All you doom sayers and crash monkies need to remember this is an election year. The voter's 401K balances _will_ be higher at year end.

Anonymous said...

The real heroes are the guys at the Mint working overtime on all those printing presses.

Anonymous said...

Too big to fail?

Tell it to the Romans.

Keep screwing around long enough and you will get F^&*ed. It might take a few centuries but it will happen.

Anonymous said...

I'm too big to fail. Where is my check?

Been to what is left of Detroit? That was too big to fail too. What middle class?

Anonymous said...

Osama Bin Laden... the most dangerous man in the world...

Bear Stearns... the most dangerous bank in the world...

Oh, no... fear the boogieman! Give up your freedoms... give up your money... the good men in Washington will save us from Axis of Evil. Habeus corpus, goodbye... transparency and constitutional rule...goodbye... it was nice knowing you.

Anonymous said...

BEAR STEARNS IS NOT A BAILOUT.

It is a bailout. You need to read about it more. The Fed is left holding the crappiest of the crap.

Anonymous said...

Bullshit. JPM bought a put from the fed. Sold to you !

they now have a 1 B first loss provision. Anything the fed loses is backstopped by the tresury. ie) if the fed "loses" $$ on the crap that it is backstopping, the taxpayer pay for it. So its a tax payer funded bailout. Equity owners get 10 bucks a share [big loss]. But the bond holders are going to get way more then they would in BK. How is that anything other then a bail out?

If the collateral is so damn good, with the FEDS blessing JPM could have scooped up all the AAAAAAA IG paper that BSC had for a song.

But they would not do it unless the FED/Treasury backstopped the deal. Doesn't that tell you that the assets the fed took are basically dogshit ?

robert said...

Steve Hamlin said...
“BEAR STEARNS IS NOT A BAILOUT. That is, the Government isn't handing $30 billion to either Bear Stearns or JP Morgan. This effort has not cost taxpayers anything so far.”

I don’t care if it’s $30 Billion or $.30. Who pays the salaries of Fed employees who brokered this deal? Who pays when Helicopter Ben keeps the printing press on overdrive to cover this and other deals? Who pays when the next specuvester says “bet it all on black, no worries, the government will cover it!!”?

Bottom line, the tax payers are paying for this debacle in some form or fashion. May not be cold hard cash; but everything from “moral hazard”, the extra cost running/funding/financing these “non-bailout” bailouts, to inflation and the devaluing of the dollar.

Anonymous said...

Steve, you got it mostly right, except for one thing...Bear shareholders deserved zero..., not $10 per share. The reason they got the $2, and then ultimately the $10, was because the public took risk to allow them to open their doors the next morning without cratering. Jamie Dimon was a puss for not holding his foot on the Bear shareholders throat. They deeserved to lose everything, because of the stupid decisions of the managers hired by the board of directors that they elected. The public, if anyone, should have gotten the extra $8 per share. Because Bear was worth friggin ZERO without the fed stepping in to offer a non-recourse loan on $30 billion of CRAP. Moral Fucking Hazard has been blown for the next 10 years...

go barack said...

I think it's time to have nationalized housing. The government will take over all housing and will assign families to housing units based on their needs. It would also be a great time to racially diversify neighborhoods. All new homes will be built according to government regulations and guidelines.

Anonymous said...

Ron Paul was not at his best today. :-(

Ron Paul Questions Ben Bernanke 04/02/08
http://www.liveleak.com/view?i=e7a_1207157685

Anonymous said...

Where is the arrest of the CEO???? Basically Bukkake has told all major institution that they can do anything they want and he will be there if they screw up. Can I get that deal too?????

Keyser Soze said...

I read this blog because it makes me chuckle...'tangelo'...I'm laughing while I write this!
Anywho...I'm not convinced that the failure of BSC would have been the end of life as we know it. Let them go into bankruptcy. Did the bk of Enron, WorldCom et al end the world? I think not.
Given, the stockholders took a haircut, the counter-parties and depositors all knew the risk inherent with investments. I think it's about time investors understood the risk of their investments...understood the consequences of their actions...became accountable for their decisions.
WTF is wrong with this country?

Keyser Soze said...

Anon 4:18 am
Well said, it is a bailout.
The RTC initially thought they were going to sell their S&L assets for near face value and ended up getting pennies on the dollar.

Anonymous said...

"...dishing out trillions to keep the Big Lie alive."

Excellent post, Keith.

Essentially, the Wall Street con-game is unraveling to the detriment of millions of unsuspecting and uninformed 'investors'--the present and future individual taxpayers...

Anonymous said...

Former President Bill Clinton is at the California Dem party get together and he gave a talk where he warned those people in attendance that we are facing a financial meltdown.

Bill ought to know. In september 1998 he told the Council of Foreign Relations i.e. Bankers that the system was bankrupt and he wanted to create a new financial architecture based on the old Bretton Woods system.

He was scandalized shortly thereafter with Monica Lewinsky and the rest is history. The bankrupt system was allowed to get worse for another decade.