Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18
More on that Gold and Silver Ratio 'Deviant Conundrum' - 13th Jun 18
Silver Shares? Nobody Cares - 13th Jun 18
What Happens to Stocks, Forex, Commodities, and Bonds When the Fed Hikes Rates - 13th Jun 18
Gold and Silver Price Setting Up for A Sleeper Breakout - 13th Jun 18
Tesla Stock Analysis - 12th Jun 18
What Happens Next to Stocks when Russell Goes up 6 Weeks in a Row - 12th Jun 18
Gold vs. Stocks: Ratios Do Not Imply Correlation - 12th Jun 18
Silver’s Not-so-subtle Outperformance - 12th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Bear Stearns Bailout and My Outrage

Politics / Credit Crisis 2008 Mar 25, 2008 - 05:54 AM GMT

By: Fake_Ben

Politics

Best Financial Markets Analysis ArticleI have been a longtime critic of the Fed, but the latest moves by the Fed are beyond even my most cynical estimations.

Bear Stearns was one of the most aggressive banks in facilitating the excessive lending that helped create the mortgage mess. This mortgage mess is impoverishing millions of Americans and affecting us all through a lower dollar and higher gasoline prices.


Bear Stearns bet heavily on the mortgage market, made billions in profits on the way up, and rewarded employees and executives with hundreds of millions of dollars in bonuses. However, once the bubble burst, Bear Stearns was proven to have been too aggressive in pushing mortgages. The value of its assets fell so far that they could not cover the company's liabilities. Bear Stearns was bankrupt, and no one wanted to buy them.

The bankruptcy of risky and irresponsible companies is an important part of capitalism. This creative destruction eliminates waste and fraud and ensures appropriate amounts of risk taking during the next business cycle.

For companies and individuals, insolvency leads to bankruptcy. However, in the banking sector, the insolvency of a major bank can lead to a domino effect, with other banks, which are owed money by failing bank, falling into bankruptcy. As a result, insolvent banks are nationalized, as happened to Northern Rock in England recently or many S&Ls in the U.S. in the 1980s. The government prevents a domino effect by guaranteeing payment to counterparties.

Why didn't the U.S. government simply nationalize and wind down Bear Stearns? If the government is in the bailout business, Hillary Clinton is now asking, why can't the U.S. government bailout homeowners, too?

Of course, the Fed claims there was no bailout, but the facts are obvious. Bear Stearns shareholders, holding a company that no one wanted to buy, received over $2 billion. JPMorgan, the buyer, received all the most valuable assets of Bear Stearns, which may be worth tens of billions, if not more, in the future. And we, the people of the United States of America ?

According to BusinessWeek, “In essence, the New York Fed [essentially, the government and therefore the people] will create a special company that will hold the $30 billion in Bear assets. It will lend the unit $29 billion at 3.25% interest and JPMorgan itself will lend the unit $1 billion. When the assets are liquidated, JPMorgan won't get back its $1 billion until after the Fed has been fully repaid with interest. And if there's any money left over from the liquidation after all the loans have been repaid, the Fed will get to keep it.” In other words, the risky, nearly worthless $30 billion in assets that were bogging down Bear Stearns have been handed to you and me. If somehow these securities end up being worth something we profit. If not, which is what the market is currently saying, all of the liability (except for $1 billion) will be borne by us, the people. And worse still, this portfolio of $30 billion in bonds will not be managed by the government, but will be managed --- at a high cost --- by one of the original creators of the type of exotic mortgage products that helped create this mess in the first place.

Why did the government hand all the upside of Bear Stearns over to JPMorgan without any calm auction process? Why did the government assume nearly all of the risk? And what do you think the chances are that Ben Bernanke, upon leaving the Fed, will get an extremely high-paid job at JPMorgan (after all, that's what happened to a lot of the Fed managers who helped bailout Long-term Capital) [participate in our poll at fakeben.com].

Please visit fakeben.com and help us to stop these continued and flagrant abuses of our system.

The Fed must be stopped before it totally destroys the dollar and impoverishes hardworking Americans through policies that encourage too much debt, not enough savings, and banking excesses.

By Charles Zentay
http:// www.FakeBen.com

FakeBen is a blog to monitor the Fed and its actions and encourage community participation. At FakeBen, we believe that the Fed policy of the last two decades has created a credit bubble as large as that created in the 1920s. This bubble will lead to either inflation, a recession, or both.

We believe that the Fed's policy of lowering interest rates to encourage more credit creation is misguided, will eventually lead to 0% interest rates, and will not solve the long-term problem, which is too much credit relative to GDP.

Copyright © 2008 by Charles Zentay. All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Fake Ben Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mom
05 Apr 08, 10:41
Bear Stearns

this is great!


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules