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The NYT Hides the Bailout of Bear Stearns From Readers
The NYT told readers why the Fed had to use tens of billion of taxpayer dollars to keep Bear Stearns in business. It explained that letting the bank go under would lead to a chain reaction of collapses throughout the financial system.
This is not true. The Fed could have followed the example of the Bank of England in its takeover of Northern Rock. Northern Rock continues to function paying off depositors and honoring other commitments. The major difference is that the incompetent managers who drove Northern Rock into bankruptcy were thrown out on the street. At Bear Stearns they are still collecting multi-million dollar salaries.
The other big difference is that Northern Rock's shareholders essentially lost all their money. That's what happens when you buy stock in a company that goes bankrupt. (It is possible that when the company is resold to the public there will be some money from the sales to kick back to shareholders.) By contrast, stockholders in Bear Stearns still have $4 billion in equity, courtesy of U.S. taxpayers.
--Dean Baker
COMMENTS (8)
In all fairness (boy, I am in a generous mood), the options markets are placing a pretty substantial bet on the proposition that Bear Stearns shares would be worth essentially zero in the fairly near future.
Also, I think there is a substantial difference in the kind and degree of risk between the Northern Rock fiasco and the Bear Stearns insolvency, but I could be wrong on this.
Posted by: Jonathan King | March 15, 2008 1:08 AM
My office is close to Wall Street and all day yesterday, the staff were worried about the ir friends who work for B/S. I kept telling them that the clients of B/S will still be there even if B/S went under. And their friends will hopefully find employment down the road following where the clients go. No - this is all one big equity play as you suggest.
Posted by: pgl | March 15, 2008 6:28 AM
You know its a bear market when the market (with the help of the Fed) bails out Bear Stearns. But if Bear Stearns' cupboard is bare, shouldn't the message be more stern than a bailout?
Posted by: Shag from Brookline | March 15, 2008 8:35 AM
You know, I wish the Fed would just take a back seat to this one. Poorly run businesses sometimes fail. Big deal. What good does B/S really do for the world? The are a business, businesses take risks to accept potentially higher returns. We can't expect the Fed to bail out B/S just because they are big. B/S is getting special treatment...but why? We live in a world of risk and return. I feel no pity for the management nor the shareholders of B/S. B/S is not the Fed's problem, if you want to invest in something the Fed will babysit, buy T-Bills.
Posted by: stocksandcasinos | March 15, 2008 11:14 AM
Dean wrote: “The Fed could have followed the example of the Bank of England in its takeover of Northern Rock.”
I agree. And while we’re at it, why should principled people worry about those who did not directly contribute to the housing bubble, yet benefited from it in a many ways? For example, do you know any homeowner who complained while his home’s value was rising to unprecedented levels over the past 4/5 years (except the disingenuous carp that his property taxes were going up)? Or did you hear people protest as their nest eggs were generously growing? So if they bellyache when these appreciated values (namely, ‘easy money’ they didn't work for in the first place) go down, where is the injustice in that?!
Let the weak banks go into receivership. Let the chips fall where they may. It's likely to be a very hard road whether we bail them out with taxpayer money, or simply let them fail. At least we would have the satisfaction of knowing we did the right thing.
By the way, whatever happened to the notion of acquiring wealth the old fashion way -- actually WORKING for it?
Posted by: Straight Talker | March 15, 2008 11:36 AM
The Fed is bailing out B/S for the simple reason that Wall St owns our political system, both Democrats and Republicans. Anyone who gets elected into office serves the needs of the wealthy. I feel no shock in any of this, its just disgusting. Its like diarrhea, you're never really shocked when it happens but its disgusting, nonetheless. The US political system is not salvageable, what we have here is pure class warfare and 99% of the public is on the losing end.
Posted by: Salviati | March 15, 2008 12:34 PM
it is time to abolish the fed, which means that it's time for us to abolish our senators and representatives en masse; since they all, democrats and republicans alike, are in the hip pocket of industry.
Posted by: David W. Runyan II | March 16, 2008 3:07 AM
I'm responding to this post, as well as your "perspective" on TruthOut.org, where you ask the question, "This raises the obvious question: Why is the Fed, an agency of the government, using our tax dollars to keep Bear Stearns and its rich managers and shareholders above water?"
Your question raises the question, Why do you not know that the Federal Reserve System is not an agency of the US government?
The Federal Reserve System is not Federal; there are no reserves; and it is a private bank, not a system. It doesn't use tax dollars to do anything but accept interest payments on the money the Congress borrows.
The design of the Fed is to do exactly what it did with Bear Stearns, to rescue the banks that are "too big to fail." The Morgans and Rockafellers were part of the cartel that formed the Fed, so it only makes sense that JP Morgan Chase would step in.
Recommended reading on this topic: The Creature from Jekyll Island: A Second Look at the Federal Reserve by G. Edward Griffin, currently available on Amazon.
Posted by: Thubten Comerford | March 17, 2008 1:58 PM