good commentary on bear stearns bailout

[solder_city]

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/17/AR2008031702406.html

be sure to read the comments section, some really good postings there-


http://www.washingtonpost.com/wp-dyn/content/article/2008/03/17/AR2008031702406_Comments.html

 

[bcarso]

It is a fascinating situation. I like the post about the pseudo-capitalists, who cry for free markets and then run for bailouts when things go wrong.

 

[ioaudio]

socialism for the rich...

 

[JohnRoberts]

I don't know in what universe a forced liquidation is considered a "bail out" of bear sterns... (sloppy thinking) :roll:

The employees (some 14k), and stockholders have taken so much pipe on the collapse in stock prices, I suspect they will fight the government intervention. One investor lost $1B on his personal holdings yesterday. Employees owned some 30% of the company. I expect lawsuits, but suing the government is rarely a winner. The horse is not only already left the barn, but is lying dead in the pasture.

The intent was to secure confidence in the remaining investment banks who are the primary winners, and perhaps us if a potentially larger crisis was averted (postponed?). Bear Sterns may have been sacrificed to make the opposite message, that they are not bailing out the fat cats. But there are winners like the company who bought Bear Sterns for pennies on the dollar, and many thousands of very visible losers.

This is a big shoe that dropped, and made a loud noise, but this is far from solved or over. "We're from the government and here to help you." :wink:

JR

 

[bcarso]

"Honey, I'm home!"

"Have a good day at work dear?"

"Well, not exactly. I lost a billion dollars".

 

[barclaycon]

Trouble is whenever there is a financial scandal on this scale, it's a case of 'Privatise the profits - Socialise the losses'.
In other words when creaming the profits off from a scam like Sub-Prime, the cash goes straight to the perpertrators. But when it all goes wrong the government, the stock market and the tax payer has to pick up the tab.

Here in England the government has just had to take over a bank called Northern Rock, otherwise there would have been massive instability on the markets. The problems were caused by greedy, incompetent managers who paid themselves millions of pounds a year, but didn't take out sufficient safeguards to cover their speculation.
They have walked away with bonuses, while we have to pick up the tab!

 

[JohnRoberts]

[quote author="barclaycon"]Trouble is whenever there is a financial scandal on this scale, it's a case of 'Privatise the profits - Socialise the losses'.
In other words when creaming the profits off from a scam like Sub-Prime, the cash goes straight to the perpertrators. But when it all goes wrong the government, the stock market and the tax payer has to pick up the tab.

Here in England the government has just had to take over a bank called Northern Rock, otherwise there would have been massive instability on the markets. The problems were caused by greedy, incompetent managers who paid themselves millions of pounds a year, but didn't take out sufficient safeguards to cover their speculation.
They have walked away with bonuses, while we have to pick up the tab![/quote]

Northern Rock is is another example of this derivative credit bubble, popping. This is a global issue. While the basic function of derivative instruments to spread risk is useful in financial markets, it can lead to serious distortions if the downside risk from such instruments (not being worth par value) is not felt by the originators.

In the case of these packaged sub prime mortgages, several people in the chain of transactions got fat, selling mortgages to people for houses they couldn't afford, with interest rates they couldn't pay. After the paper got flipped a few times the only people left on the hook were the home buyers and the poor sucker at the end of pipeline holding the paper when the music stops and there are no chairs left. The home owner has the option of walking away but, the market finally wised up that this paper wasn't worth what people were trying to sell it for and stopped buying. Lots of big institutions got stuck with huge holes in their balance sheet and net worth.

This will not be over until all the false value is deflated from home prices and institutional balance sheets. While I am not a fan of more government, these derivatives are a little like printing money so need regulatory oversight.

I'm not familiar with the corporate structures in GB but assume it is similar to here. I believe Richard Branson was trying to buy Northern Rock, but may have run into government approval or just the worsening credit markets problems.

The Bear Sterns deal was not a bail out and actually a take under... The former owners lost most of their capital. For many of the 14k workers who owned 30% of Bear Sterns they lost their life savings. The government ended up guaranteeing the worth of the $2 bid, not the original company value.

The "privatize profits and socialize losses", is a clever turn of phrase but a mean spirited spin on this. That said there were abuses and way too much unearned income generated at every step of this derivative pipeline.

The issue now is how to manage the disconnect between all these incorrectly valued assets and reality. I am nervous that our central bank may be inflating the currency to bail out overextended home debt and institution holding this debt. This is in fact "socializing" the loss, and punishing all of us who didn't buy inappropriate houses, or deal in funny deriviatives.

An ugly situation all around with no easy answers. There is not a small cadre of sleazy business people with all this ill gotten gain sitting in a handful of numbered swiss bank accounts. The windfall has been mostly spent by many thousands of people, and trying to reconstruct who got what would be Herculean.

I don't like it but it is the nature of government assistance to socialize loses and this will be felt widely. Another downside is they will turn a sharp painful correction for the (not so) few, into a prolonged drag down for the rest of us.

JR

 

[barclaycon]

The "privatize profits and socialize losses", is a clever turn of phrase but a mean spirited spin on this.

Oh yeah ?
It's just been worked out that every taxpayer in this country will have to pay £880 for the Northern Rock bailout.
Two thousand employees will lose their jobs starting next year as part of the clearout to make this bank viable. Tell them about 'mean spirited turn of phrase'
My pension is dependant on the stock market - which has dropped considerably in recent months.
It's estimated that the government has pumped over £25 billion into this bank. That's more than we spend on the armed forces.
The only thing you've said which I agree with is that there was regulatory failure while this was going on. Supposedly the FSA (Financial Standards Authority) were in charge of making sure this didn't happen. But the highly paid people who run this organisation failed to to spot it. They didn't even know how Sub-Prime worked (ref. Dispatches programme Ch.4)
The ever grinning Richard Branson saw a chance to make some easy money by taking over Northern Rock and combining it with Virgin Money - but even though the government was desperate to unload it, it would have been political suicide.
I'm confused as to what your position is on this. You seem to be suggesting that this is some kind of cyclical phenomenon.
In actual fact it has been caused by Bankers greed and regulatory failure.

 

[sodderboy]

[quote author="barclaycon"]You seem to be suggesting that this is some kind of cyclical phenomenon.
In actual fact it has been caused by Bankers greed and regulatory failure.[/quote]

The greed is constant, the "music stopping/ no chairs left" is cyclical. This time it was real estate, before it was dot-bombs, before that it was telecom, before that asian currencies, now it looks like commodities is the choice for the greedy lemmings. Any schmo can now buy, or short sell an ETF in metals, pork bellies, metals, whatever. The needle is still on the vinyl for now. . .
I also agree that regulation and disclosure is important. To have assets that cannot be valued is dangerous. There was a clampdown here after the "gay 90's" with publicly traded companies, and now the same scrutinyneeds to be applied to the derivatives markets, which are more pure gambling than anything else.
I am not familiar with the Northern Rock situation, but here the taxpayers are not buying Bear Sterns. The Fed is doing much the same that they did with Long Term Capital Management back in the 90's when their Russian bond play turned into bupkiss. The Fed got a few large banks together and they bought LTCM's assets.
I would look closely at the 88 quid per taxpayer figure. With a 2007 estimate of 60.7 million, that means less than less than 50% of citizens pay taxes? Unless pensioners are exempt from VAT, everyone pays some taxes.
Anyway, what does your local MP say about it? They must be going for the lesser of a few evils. How much would it cost if they guv did not buy them? That was the quandry for the Fed here with Sterns, LTCM, Penn Central, etc.
Mike
PS: is that volta I smell :wink: ? His Fed bots must be ringing all over the place. . .

 

[guitarbill55]

Just think though, doesn't it give you a warm fuzzy to know that all the golden parachute artists are strolling down the beach in the caymans on your tax and investment dime?

 

[barclaycon]

Actually the cost to the taxpayer for Northern Rock is much higher (I left a 0 out!). And that figure is the lowest of many that have been quoted!
It doesn't stop with Northern Rock either. Today unscrupulous traders have been spreading rumours that HBOS is about to run out of money -
thereby causing more market turbulance while they make a killing on the shares.

 

[JohnRoberts]

No I am not an apologist... just trying to tell the whole story. Since I haven't personally profited from sub prime lending or selling derivatives, I am in the "everybody else" group who is left holding the bill. I don't like the stereotypical demonizing of the actors.. many were lucky fools, in the middle. I don't even suspect some evil master plan, just a deal that turned out to be too good to be true, and the music finally stopped.

Derivatives were not regulated and that caused a distortion in the availability of credit. This cheap credit caused a bubble in home prices.

Bubbles are not cyclical per se, but occur whenever there is some distortion that causes an artificial (high) expectation of future value. Easy credit made it easier for people to pay too much for homes, They incorrectly believed prices would keep going up forever so bought more than they should have, feeding the bubble...

There another old wall street saying, nothing ever goes all the way up to the sky, and home prices are no exception.

JR

 

[sodderboy]

So out of a country of 60.7 million, only taxpayers, all precious 2.8 million of them, have to pay 880 each for the bailout of 25 billion?

That totally stinks of demagogic "new math" to me. It stinks at 88, uh, there's the £! each, and it really reeks at 880£ each.

The math is farcical, and it fits very well with a "socialize the loss, privatize the gains" mentality.

Mike

 

[Greg]

This situation is unfortunate. There was so much bad paper (i.e. suprime) that many of these banks and brokers didn't even know what they were buying. Perhaps more regulation on brokers is the answer...

I am very torn on whether or not I feel the Fed did the right thing. In one sense, I am not for socialized goverment in any way, shape, or form. If a company screws up and needs to go out of business, then so be it. But a huge brokerage firm like Bear Stearns going belly up or getting bought for peanuts would have sent a shudder through the financial markets which in turn could have killed confidence and ultimately crippled our financial markets and the rest of the worlds. So maybe taking one for the team is the better option.

Also, Lehman and Goldman reported tapped the Fed discount window this week. But this is not a totally uncommon practice. Borrow from the Fed at 3% and loan it to people at 5%+.

One other point I'd like to make... I actively invest and trade in the stock market. When I heard about this subprime mess, I wanted to find a small or mid cap regional bank that didn't take part in all this mess with the idea that these guys would come out on top once people realized what was going on. After searching for weeks I found a company that fit the bill and started piling in. As of the close yesterday, the Dow Average is down over 6% this year. This regional bank is up over 20% this year. This has been the one savior in my portfolio this year.

Point being... even in a crazy market, there are oppurtunities to make money out there.

 

[barclaycon]

So out of a country of 60.7 million, only taxpayers, all precious 2.8 million of them, have to pay 880 each for the bailout of 25 billion?

Hey Mike, I didn't calculate the figures. That is the most conservative estimate. One report is quoting £3500 per person:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/19/nrock119.xml

Whatever happens WE are left carrying the can.
The managing director of Northern Rock (who paid himself £1.3million a year) walked away with a bonus and still maintains that his business model was 'sound'. We haven't had a run on a bank like that for 150 years; and things are still looking shaky.
So I say again. When the dodgy dealing is pulling in the cash, it goes straight into their accounts. When it all goes tits up, we have to bail them out. It's not the politics of envy. It's blatent unfairness.

 

[JohnRoberts]

While the burden is shared more evenly to the direct (taxation) and indirect (inflation) payers for this debacle, there is another group not getting much sympathy. A recent number I heard is that some 100,000 people in the financial industries have already or will lose their jobs over this meltdown. This doesn't include the home building sector that has already been in decline for quite some time. Lots of people who danced to the music for a while until that music stopped.

All those employees were also beneficiaries of this diverted capital, and ironically they aren't paying taxes now for a while. I doubt they feel very lucky though.

Plenty of pain to go around.

JR

 

[solder_city]

http://news.yahoo.com/s/nm/20080326/bs_nm/bearstearns_protest_dc

 

[bcarso]

Another POV on bailouts: http://www.fee.org/in_brief/default.asp?id=1976

 

[solder_city]

EU opens Northern Rock investigation

http://news.yahoo.com/s/ap/20080402/ap_on_bi_ge/eu_northern_rock

 

[JohnRoberts]

Bernake is being questioned by congress right now about the Bear Sterns take under, et al.

I saw something in the paper yesterday about more losses expected from Northern Rock.

The larger part of the iceberg that is underwater (no pun intended) but can still sink the ship is all the mortgage resets due in the next few years from ARMs. In one (overheated) market some 2.5% of mortgages are in trouble.

More shoes to drop... and there is no simple answer for this IMO. Getting real estate values to reflect reality will be painful. More so for these folks in marginal loans.

JR

EDIT: oops... from todays paper there's a area in Fl with 5.8% troubled mortgages.

Another though in passing. It seems unwise that so many people enter into what is probably their single largest lifetime purchase, the home buying transaction, without adequate advice/representation. There is a sense that the real estate agent is working for both parties, but in reality the agents are working for themselves. Perhaps if commissions were refunded upon foreclosures they would be more responsible to both seller and buyer.