Sunday, March 30, 2008

Bear Sterns

I started this post last Monday and then got distracted. Looking at it now, I think the fragment is worth preserving.
I’ve spent the past week being pissed off at all the people who were pissed off about the so-called “bailout” of Bear Stearns. In the light of this morning’s [Monday the 24th] news, I’m starting to half agree with them.

Earlier, I was going to write a post about what a lucky accident it was that the current Fed Chairman is also one of the world’s foremost experts on the problems of the early 1930’s. Now I’m beginning to wonder if it would have been better to have someone with a less well-matched academic background and more poker skills.
In retrospect, it appears that the $2/share price in the original version of the Bear deal was not a real price, just a piece of propaganda, intended to give the impression that it wasn't a bailout. But it's now clear that, whether or not one calls it a bailout, Bernanke offered a lot more in loan guarantees than was really required to get J.P. Morgan to do the deal. (The $1 billion deductible on the new version of the deal is not very convincing as a concession by Morgan, and in any case, it only makes it more obvious that the Fed's original offer was much higher than it needed to be, if Morgan is willing to take a hit both on the special financing and on the purchase price.)

I don't think that's exactly a moral hazard problem, but it's the same general idea. The next time the Fed wants somebody's help to keep the financial system afloat, that somebody will know to charge dearly for that help.


UPDATE: And another thing. What the hell were Ben's priorities? If he wanted to reassure the financial markets, he shouldn't have pushed for a price that made Bear Stearns appear to be in much worse shape than it actually was. (Did that just not occur to him? Did it not occur to Tim Geithner? Did it not occur to anybody at the Fed?) If he wanted to make the Fed look tough, he shouldn't have offered way better financing terms than were really needed to get the deal done. (As noted above, both the price and the financing terms got worse for Morgan subsequently, and they were still willing to play.) Did it not occur to him that being tough with winners was important for the Fed's reputation too, as well as being tough with losers? This was a major screw-up.

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18 Comments:

Blogger Alix Lakehurst said...

I barely understand this stuff. I only see it as the people who were in charge were awarded with money. I heard that the money these guys got was from our tax dollars. I also read that these people in charge essentially stole money from smaller companies and regular people who wanted their help. Let me know if I'm wrong. And what does that mean for the economic future and how it effects us.

Mon Mar 31, 09:06:00 PM EDT  
Anonymous Dan Ryan said...

Isn't it more important to punish Bear for its irresponsibility than Morgan for its participation in the bailout? Allowing Morgan to 'underpay' for Bear assets reinforces the incentives for the next Bear to be careful.

I do suspect that the low price for Bear is in substantial part a return on making a purchase without time for due diligence. The more days go by, the lesser that particular uncertainty premium.

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