Saturday, March 15, 2008



Yesterday, the Fed came to the rescue of Bear Stearns using JPM/Chase as a conduit because, while not impossible, lending directly to non-banks through the discount window is an unusual, eye-brow raising, and potentially precedent setting event. That JPM/Chase is a mere conduit is confirmed by news that it is the Fed, not JPM/Chase, that is on the hook should Bear default. Hillary Clinton, on the campaign trail said of the Bush administration (paraphrasing, not quoting; I don’t have the quote in front of me) that when the average person needs help, Bush says to let the market work, but when a major investment firm gets into trouble, the Bush people snap to attention. She is absolutely right.

One could argue that the Bear bailout was a Fed, rather than an Administration, operation, that the Administration had nothing to do with it. That would be more than disingenuous; it would be wrong. Treasury Secretary and former Goldman Sachs CEO Hank “Mr. Free Market” Paulson was in on the conference calls on which the bailout was arranged, according to Mr. Paulson, who also said that he had a stake in making the effort work. Clearly, the “free market” Bush administration was involved in this effort. They admit it, despite their repeated protestations (a $12 word for “lies,” in this case) that they believe the government ought not to overreact to our current economic travails.

One could also argue that this is one of those cases in which the Fed, even if at the behest of the Administration, did its job, which is to avert financial disasters. Whether averting financial disaster is the Fed’s job is another conversation, but clearly this bailout transcends the government’s role of protecting seemingly innocent small depositors and investors from unforeseen financial follies or facinorousness. Bear did trades with big players: mutual funds, hedge funds, other brokers, the U.S. government, etc. Bear is not a community bank. Bear isn’t a commercial bank. Bear isn’t Charles Schwab, E-Trade, or even Merrill Lynch. Bear plays with the big boys and used to pride itself on being a big boy. But such is the case with most Wall Street free marketeer tough guy types…until they need to dip their hands into your wallet. But I digress. Proponents of the bailout admit, if even in a sideways manner, that Bear really was not one of those financial ingĂ©nues that needs help from the government when those proponents argue that, while some degree of moral hazard may be involved here (Even the most shameless do not completely eschew the notion that this transaction reeks of moral hazard.), the bailout was necessary because, without it, Bear might default on its repos causing losses among money market funds that hold such paper. The argument seems to be that, yes, bailing out a big tough guy (And make no mistake, even back in the ‘80s and ‘90s, when I was in the institutional money business, Bear prided itself on being one of the really tough guys.) like Bear Stearns might be fraught with moral hazard and is not the government’s business, but the government should do it to protect the small guy’s money market fund.
However, money market fund shareholders (and I am, and doubtless most, if not all, of you are, among them) should be aware that such funds are not guaranteed or backed by the government. Money market fund managers can, and did, in this case, make mistakes. Just because many, if not most, people own money market funds does not mean that the government is responsible for the amateurish misdeeds of their highly paid managers. What next? Just because many people owe more on their houses than they can afford to pay, the government should…..Never mind.

Others will argue that the bailout was necessary to prevent a collapse of the financial system. But Drexel and Refco were allowed to fail without a collapse of the financial system. Yes, I know…this time it’s different. In what way? Because there are far more derivative contracts involved, contracts the traders of which, even the creators of which, don’t understand? Why should the financial foppishness of the bad boys on Wall Street be of concern to the average taxpayer? They bet. They lost. Too bad. Undoubtedly, the real economy will be damaged, and there will be pain for the innocent, as a result of the misguided adventures these charlatans took with other people’s money, but that is the way the world works. Trying to avoid the damage merely postpones, and intensifies, the damage.

Bear’s stock (BSC) fell 47% yesterday to close at $30.00. Perhaps this is putting it too simplistically, but if BSC does not eventually go to zero, or close to it, then we will know that this bailout, ostensibly to help the innocent investor in money market funds exposed to Bear repos and/or to avert the collapse of the financial system, was really designed to help out those poor souls, like Jimmy Cayne and Alan Schwartz, who run, and are heavily invested in, Bear.

Your tax dollars at work.

And, full disclosure: At this juncture, I am neither long nor short Bear common, puts, or calls, and I don’t know whether that will change. And no, I wasn’t long puts on BSC Friday morning. Oh, well. I wasn’t long calls, either, but that should come as no surprise to regular readers of the Pontificator.

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