Talk Talk Talk Talk Talk Myself to Death: The Growing Financial Mess

Tuesday, March 18, 2008

The Growing Financial Mess

So what's going on on Wall Street? Don't look at me. In fact, I'm a bit surprised you'd even ask me about that.

It sure is worrisome to see financial news getting worse and worse. The Bear Stearns sale to J. P. Morgan seems to have taken a lot of the financial markets by surprise. Not only did shares close at $30 on Friday only to be sold for about 6.5 percent of that over the weekend, but shares were going for around $158 a mere nine months ago. Did J. P. Morgan get a windfall in the deal? There are all kinds of opinions, but this one from Dean Baker, co-director of the Center for Economic and Policy Research, made sense to me.

The news that J.P. Morgan bought investment house giant Bear Stearns for just $236 million, or $2 a share, sent tremors through financial markets around the world today. This is company whose stock was worth almost one hundred times as much a year ago. Its building alone is valued at close to $1 billion, which suggests that all the other assets of this 85 year-old investment bank had a negative value – Bear Stearns liabilities exceed its assets.

Further confirming this view is the fact that the Fed apparently had to make guarantees to J.P. Morgan of $30 billion in order to get the bank to take Bear Stearns even at this price. That suggests the bank had a lot of real garbage on its books. The markets are right to be worried. Of course with the $8 trillion housing bubble in full meltdown, there will undoubtedly be much more bad news for the banks in the months ahead.

So instead of getting a deal, was J. P. Morgan pressed into taking on Bear Stearns' obligations? That bodes ill for what may lie ahead.

And what does lie ahead? Paul Krugman wrote, "O.K., here it comes: The unthinkable is about to become the inevitable." What is both unthinkable and inevitable? A federal bailout of the financial system.

Many people say that the government should let the chips fall where they may — that those who made bad loans should simply be left to suffer the consequences. But it's not going to happen. When push comes to shove, financial officials — rightly — aren't willing to run the risk that losses on bad loans will cripple the financial system and take the real economy down with it.
. . .

the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.

According to late reports on Sunday, JPMorgan Chase will buy Bear for a pittance. That's an O.K. resolution for this case — but not a model for the much bigger bailout to come. Looking ahead, we probably need something similar to the Resolution Trust Corporation, which took over bankrupt savings and loan institutions and sold off their assets to reimburse taxpayers. And we need it quickly: things are falling apart as you read this.

If that's not cheery enough for you, Krugman ends one of his most recent blog posts with, "Things fall apart, and the center doesn't exist."

Yeah. That's good to know.


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