Redstate

Massive legislative initiatives generally come at inflection points in history. When enough people become alarmed, you get windows of time in which natural inertia becomes suspended.

That's what we have now. We had a similar moment after the Enron fiasco, and we got Sarbanes-Oxley. We had on in the early Thirties, and we got the New Deal.

I'm not sanguine that something similar will happen in three or five years when the unintended consequences of what happens this year become apparent, because the political moment will have passed.

There's now a significant risk that we'll get a permanent change in the economic landscape along the lines of the New Deal. Regardless of who becomes President next January.

The $2/share deal was made at a total crisis moment, with no more than an hour to spare before Asian markets opened last Sunday night (New York time). Morgan had nothing but a very tense weekend for due diligence on the Bear asset portfolio. They made just about the same offer I would have.

If the true value of Bear Stearns is considerably higher than $2 a share, you'd better believe there will be shareholder lawsuits. And offering $10 now might be a good way to forestall going to court.

I'm just guessing, I don't know any of this for sure.

I thought that meant they were forced to lend JPM X5 as much principal...

"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.

On my way to work this morning the radio news was reporting the Fed was saying that they might back out of their part of the deal if the acquisition price goes too high. They made reference to the Fed not wanting this to look like a bailout.

Personally, I didn't see how this was going through without a court fight at $2/share. Somebody somewhere who objects to the firesale price has to own at least one share of stock. After that I think that even if you could objectively prove $2/share was a fair price, the courts would still be going after someone for not fulfilling adequate "fiduciary responsibility" on behalf of the stock holders vis a vie the sale.

Now, personally, I think $2/share is way too low, and that it would be nice if cooler heads prevailed, enough credit was made available to ride out the short term, and the long term higher value of the stock prevailed, although I think that long term value needs to be significantly under $170/share. But then again I think CEO's who foul things up this badly shouldn't get their signing bonus let alone their performance bonuses, and that ain't happening either.

... it's precisely what will be happening regardless of the price, so we had better get used to it. $30B is bad enough, though I understand the necessity. $150B would be completely unpalatable for most. Well by "most", I of course mean those who do not own any JPM or BS stock. Those that got paid in options at BS and leveraged their finances against their on paper wealth are going to take it on the chin, so they'd understandably react like cornered mice and jump at the throats of this deal's pitchmen and prognosticators.

...offer: I just read this morning's reporting from the NY Times. They point out that the Fed may hesitate for political reasons. It's just about understandable for ordinary people reading MSM headlines that $2/share is rape and pillage, and not a bailout. That might be a harder sell at $10.

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of $10. The sweetened deal will reduce their pain somewhat, but that's all.

But the speculators who bought last week will make a killing.

The government- unintended consequences, all the time, even when they are in the right.

I was just reading a letter from SEC Commissioner Cox to the head of the international banking standard-making body in Basel.

The SEC has been monitoring Bear Stearns's net-capital and liquidity levels on a daily basis for months now. They show a sharp deterioration in Bear's liquidity position on March 13 and 14 that was not supported by any impairment in the companies assets or collateral.

The rest of the market just decided to trading with Bear Stearns. That's instant death.

Morgan did a heroic thing, stepping in to pick up the corpse. It's up to them to follow through in such a way that doesn't tie everyone up in court for years to come. (And it won't be easy, either.)

But the moral authority of Bear's shareholders to say anything about it is minimal at best. Their company died fair and square.

and I don't think they're going gently into that good night.

Your note on the SEC raises an interesting question: how did the market "decide" to stop trading with Bear in the absence of impairment in its assets or collateral?

The old "cui bono" test seems to be called for, especially if this isn't the last time the big players so decide.

I always find myself reaching for jungle metaphors when describing how markets work. If you're in trouble, you have every incentive in the world to lie about it. All of your counterparties know this (because they would behave the same way). So when they hear rumors, they don't believe your denials, and they figure they'd better not be the ones holding the bag in case you really are in trouble.

Bear found themselves unable to borrow short-term money (which all broker-dealers must do continuously), even though there wasn't the slightest problem with their collateral.

Self-fulfilling prophecy.

This doesn't happen with banks anymore, because of deposit insurance. On Wall St, it's an ever-present danger.

And for what it's worth, the SEC and FBI are already investigating scattered reports of people who spread nasty rumors about Bear the week before last, after taking the equivalent of short positions in Bear stock.

If the world were a just place, those people will get caught and go to jail. By and large, the world is not a just place.

in this. And I hope the feds start worrying.

If all it takes to bring down a major financial institution is coordinated rumor-mongering detached from facts, think of what our nation's adversaries could do with this.

Greedy bastards abusing grapevine are bad enough. But suppose foreign entitites start waging war by other means?

Well, that's the question isn't it? When people like me see statements like:

They show a sharp deterioration in Bear's liquidity position on March 13 and 14 that was not supported by any impairment in the companies assets or collateral.

they start to wonder whether there were other shenanigans going on. And the if any of the ones who do live in one of those states with generous class-action laws... Oy vei what a mess.

But you're the guy who swims in those waters, so I'll take your word for it that they died fair and square.

n/t

I now wonder why the Fed got involved at all. You make it sound like JPM could have called BS up and told them to take our offer or die like squaealing pigs.

"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.

Morgan didn't need to tell Bear any such thing. All they had to do was look each other in the eye. Whoever shows fear first, dies.

Bear has been on the other side of trades like this so many times that they knew exactly what was happening. That's life in the big city.

The Fed got involved because they badly wanted to see the deal happen. When you have two days to decide whether to buy a pig in a poke, it really helps to have your Daddy tell you that he'll backstop your risk.

Especially when Daddy is facing a much bigger mess if you decide to pass.

But it does sound like a $29bil securitized loan rather than line of credit. Worth pointing out that Morgan is bearing the first 3% of risk to the securitizing assets while the Fed gets all the upside potential.

The New York Fed finally has said something about it: here.

I think I'll try to find out what's really going on here.

And make no mistake about it, regulation IS power.
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CongressCritter™: Never have so few felt like they were owed so much by so many for so little.

You use logic.
Liberals do not.

Before we had financial regulation, we had financial panics, with runs on banks. The recessions since the new deal are nothing compared to the financial meltdowns that befell this country prior to the Fed being created in response to the 1907 panic and the banking and securities reforms put in place in response to the Depression.

With the FDIC guaranteeing deposits and the fed providing liquidity, we don't have runs on banks anymore. That's very good for business. You don't realistically get the FDIC and the Fed, with the government purse ultimately guaranteeing the banking system, without someone providing some regulatory oversight to make sure the books aren't cooked and that reserve levels are prudent.

Federal securities regulation up until now has been a whole different ball of wax. The SEC is mainly about disclosure. The SEC doesn't tell people what stocks they can buy, or at what price, but rather focuses on making sure that those who do buy can act on honest information.

With the financial innovations of the last twenty years, the system that worked pretty well for a half century is out of date. No one understands the shadow banking system, and no one effectively regulates it. All the same, as we've learned in the last few days, hundreds of billions of dollars of public money can be put at risk to prop this system up.

If my tax dollars are going to be confiscated to prop these firms up, I very much want someone making sure there are some sensible rules in place.

Beyond that, sometimes regulation helps people do business. The transparency provided by the SEC's regulation ultimately helps the financial markets work because investors in this country can have a fairly high level of trust. (If you really like unregulated markets, you might want to move your IRA to Zimbabwe.)

It's not going to be easy to intellectually design a regulatory system that makes sense in today's world. It's going to be even harder to get one through the political hoops. All the same, if we want continued financial growth, we can't have gridlocked financial markets, and that means we are going to have to have a regulatory system in place that lets firms trust each other.

If the state has inherent power anywhere it spends money, isn't that the justification for totalitarianism?

You have no civil liberties, becuase if I'm going to pay for police to keep you alive, I don't trust you to make your own decisions. Suck it up.

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