The Demise of the Big Bear

Read this three-part series about Bear Stearns's last days. It's fascinating. I can't wait for Part 3 tomorrow. I'll add it to this post.


[Thanks to Indymedia.org.uk for the photo.]

Part 1

Part 2

Part 3

This will make a great movie. Hint hint.

Government Intervention Run Amuck No. 12: Bear Stearns Buy-Out

It's amazing how the examples of our government-genie's clumsiness seem to jump off the pages at me on a daily basis.


[Thanks to mwctoys.com for the image.]

I opened today's Wall Street Journal to fall upon this headline.

The Bear Stearns collapse and the subsequent scrambling of the Fed, Congress, J.P. Morgan and the victim Bear Stearns itself, are a great example of how too much government power gets us in trouble as a nation.

I ask you: What business does the government have (whether it be the government-proper or one of its side-kicks like the Federal Reserve) fixing the price of a failing market participant on the brink of bankruptcy? What superior knowledge will permit the government or its agencies to pick the right price?

The answer, of course, is none. They have no business, they have no knowledge, and they are fixing prices--something they profess to be loathe to do.

Not only that; they're doing it with the collusion of the two parties--or least the door is open to that accusation.

And now they're stuck with trying to explain their decision, and they will find this to be a most difficult task. They have chosen some participants over others, putting themselves in the position of the God of Markets. As such, they will recuperate the full force of all the accusatory fall-out that would normally have disinflated itself ricocheting off only non-actionable "market forces."

Here's an example of today's self-defensive jaw-boning:

"'There was a view that the price should not be very high or should be towards the low end...given the government's involvement,'" said Treasury Undersecretary Robert Steel.

The price had been set at $2, but now it five times that, for no apparent reason other than to squash dissent, to find a compromise.

So now, instead of having a bankruptcy (which is what the market would probably have required) and a few days of discomfort, we now have lawsuits, justifications, rationalizations, suppositions and hypotheses about dire consequences that they have no way of foreseeing.

Just another lesson in what is apparently going to be a very long list in my series illustrating government clumsiness.

Another Behind-the-Scenes Wall Street Bailout

Most people don't know it, but the financial world almost stopped turning in 1998 when a huge hedge fund called LTCM (Long-Term Capital Management) "lost $4.6 billion in less than four months and became the most prominent example of the risk potential in the hedge fund industry," according to Wikipedia. ($4.6 billion in 1998 is the equivalent of $5.79 billion in today's dollars. Source)

Fearing devastating repercussions at the time, the Central Bank of New York got involved, and a "bail out" arrangement ensued whereby several large financial houses agreed to back the bad loans.

Where have I heard before that history always repeats itself? We now have a similar situation happening today, only the present-day LTCM is Bear Stearns. This time, we're talking about $3.2 billion at risk, guaranteed by Bear Stearns itself. The quasi-authoritarian intermediary this time is Blackstone, whose two principals are a former classmate of Bush at Yale and a former US secretary of commerce, the same Blackstone in which China just invested mucho dollars. (Aside: Has anyone investigated the potential conflict of interest with this kind of mixed-bedfellow deal? But I digress.)

So far, this is well within Bear Stearn's means, so panic hasn't started yet. But the jitters have begun in earnest, as players watch the other hedge funds that have highly leveraged portfolios as well. There may be a steady flow of money coming into the country even as the big players unwind their unbalanced dollar portfolios, but panic is a funny thing: it doesn't always listen to reason and won't always wait for a level-headed solution to an immediate sticky problem.


[Thanks to number-10.gov.uk for the image.]

The problem irking everyone is that the global financial markets now flow so easily from one country to another, and from one sector to another, and the sums are so huge, that any sign of instability could create a panic environment. The US deficit is supported by billions of investment from foreigners, and these investors have already begun to diversify away from the US dollar as it loses value on the international market. (It has gone from $1 = euro 1.20 to $1.00 = euro 0.74 over the last 6.5 years.)

Whether or not this situation is actually going to threaten America's financial stability is not a sure bet. There are those who deny that the LTCM matter was life-threatening, ironically among them the former chief of Bear Stearns himself. But there is a consensus that there exists an unsavory level of leveraged risk-taking at the present time.

I'm all for risk taking, assuming that it will be the risk-takers who pay the piper, and not the rest of us. Unfortunately, as I have explained in previous posts like this one, I believe the central banks are responsible for this situation and that we are all paying for it through diversion of real wealth to such lottery games, due to the uncertainty of the financial times we live in.

For more on these events, read this article at The Economist, this one by Michael Panzner at SeekingAlpha.com, and this one by Jody Shenn and Bradley Keoun at Bloomberg.

This is definitely something we all should be following closely.