Game Over, Man
David Weigel | March 16, 2008, 5:54pm
Bear Stearns is about to get Raptured.
Bear Stearns Cos. was closing in on a deal Sunday afternoon to sell itself to J.P. Morgan Chase & Co., as worries deepened that the financial crisis of confidence could spread if Bear failed to find a buyer by Monday morning.
People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading. "None of these things is done until they're done," Treasury Department spokeswoman Michele Davis said Sunday afternoon. "But I think everyone's expectation is sometime in the early evening hopefully" the deal will be done.
Terms of the deal were still being hammered out Sunday afternoon. Reflecting the dire situation at Bear, the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m. Last year, the shares hit $170.
Our cultural doomsayers have been predicting something like this for years. The surprise, for many of them, is that it wasn't China that pulled out the rug. To debate: What should the Fed do? (Now that Ron Paul won't be president we're more or less stuck with it.)
Some thoughts from occasional reason contributor Megan McArdle.
Kolohe | March 16, 2008, 7:05pm | #
"What should the Fed do?"
What they did with Bear Sterns was a deviation from their normal mandate and used dual path to legimize it. They used
1) a middleman to front the op (JP Morgan), and
2) a short-handed vote to authorize (normally 5 out of 7 need to agree to lend to a non-bank; but two seats are empty, and one dude (or dudette) was on vacation in Europe and could not be reached, so they invoked an emergency clause to get the four dudes(ettes) to bless the transaction.
Now, since they tried to follow the spirit and letter of the law as much as possible, and were presented with a genuine crisis (of unknown magnitude until hindsight clears up to 20/20 with the bifocals of time), I am willing to cut them so slack on this one.
Unlike many around here, I am not opposed to fiat money, fractional banking, nor the federal reserve system.
The problem is they can't do much anymore. The fed can normally only do three things open market operations, adjust the discount rate, or adjust reserve requirements.
Well, they obviously they ain't going raise reserve requirements in a credit crunch.
The open market operations don't seem to have the market's cooperation, as seen by current spreads from the target funds rate and money is costing these days.
The discount rate is down to 3 and half, and half as much as it was a year ago. They'll probably drop another 3/4 this week (I doubt they'll go the full point, but many are betting that way). The flat CPI in Feb gives them a narrow window to create cheap money with a lowered inflation risk. They could go to zero (the Japanese did), but I can't seem them going back to the 1-2 percent in the absence of a real crisis (like 9/11) before inflation and foreign exchange obliterates the gains from such a move. So, they have little room to maneuver after this week's move.
By letting things go as long as they(the fed) did (i.e. until the early 2006 tightening), and the non-intervention by the Bush administration on the political front - either with soft power of the Treasury dept or the hard power of the regulatory agencies, nobody has any 'leverage' - or rather insufficient leverage against the way the negative leverage of the unwinding derivatives.
Kolohe | March 16, 2008, 7:28pm | #
I also things are both worse and better than they appear. Or more precisely they are going to get worse before they get better, but they will get better.
Worse, in that the real peak of crappy mortgages will only come to a head later this year. The worse standards and a outsized chunk of money are in loans written in early 2006 - thus mid 2008 is when a peak of the Chickens come home to roost. So things are going to be really bad this summer, and we will be in a definite recession in qtr 2 and 3 of CY 08.
But better, in that after this wave is past, things will start looking up
a) By 4th qtr 08, a lot of toxicity will be out of the system.
b) Plus obviously by Nov we will known who the president (and Congress) will be over the next 4 years (notwithstanding 2000). And it doesn't matter who it is, it it the uncertainty that will dominate the financially markets until then - once resolved, it will be 'right-sized'. And I don't thing the 'masters of the Universe' will necessarily be running scared at a "crytpo marxist Obama' president-elect. I think they will see him a someone they can do business with (in return for throwing their weaker members under the bus - e.g. cooperation indictments in cases like Bear Sterns)
c) And as a side effect, if the Democrats do get the white house, as is likely, the Iraq debacle will not necessarily be over, but there will definitely be a pull back, and thus the economic drain will abate. Although the gains will be more long term (e.g. the peace dividend took about eight years to get the tech boom), the 'certainty' of the Iraq path will start to be priced into system and thus strengthen the structural elements that are weak now.
The coming recession will also pop the bubble of commodity prices as demand finally abates, and the speculators take their profits and/or cover.
So if I knew how to do this, I would short gold, oil, and the Euro for closing prices of
$800, $80, and $1.30 respectively sometime in the first half of Jan 09.
Kolohe | March 17, 2008, 1:04am | #
We've transitioned from a fiat currency back to real money twice in this country. The first time was when the continental dollar collapsed, the second time was when we did away with the greenbacks. We've had one orderly transition, and one hyperinflationary collapse.
I'm not really sure which one you characterizing as which. The post-revolution one, though, was facilitated by the Hamiltonian, pro-proto-wall street, pro-central bank policy of the federal assumption and repayment of all continental debt at parity (and IIRC with the interest owed). I would say I am the one who is more of a Hamiltonian in my comfort with the Federal reserve system - the heir of his pet project the Bank of the United States - so that example is at the very least ironic.
And the post civil war reset was enabled by the practical elimination of the federal government - all that was left for most of the late 19th c were customs guys to rake in the tariffs, the 7th cav to kill the Indians, and dudes to dole out veteran's benefits. I love minimum govt as much as the next dude, but see that it not politically possible, esp in the present climate.
We've been in what seems at the time like deep doo-doo a couple of times since the 1910's, but have always managed to muddle through, and since 1945, always after no more than about a year or so.
Yeah mathematically we dropped to #2 this weekend. It doesn't mean I need to learn to speak Visigoth. We still big - too big to fail? -no of course not. But we're still among the best three or four games in town. Plus, the worst case scenario, at least in our lifetime, is not Rome 476. It's late 20 c London. Gave up its overwhelming #1 position in 19th century to New York and Tokyo. But to this day it's still mostly Visigoth free - and has done pretty well this decade.
As P.J. Orourke said, the inherent fakery of the dollar is balanced by the fiction of the Euro, the fantasy of the Yen, etc. Putting this all on the system, rather than the choices made within that system, is a mistake
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