Paulson Defends Bear Stearns' Rescue ( Rescue? but they needed liquidation)

Forbes ^ | 03.16.08, 12:16 PM ET | Forbes.com Staff

[Ernest_at_the_Beach]

U.S. Treasury Secretary Henry Paulson did the rounds of America's Sunday morning TV shows to talk up the U.S. economy, promote confidence that financial markets would get through their present troubles and reassure a skeptical American public that the Bush administration was on top of the situation.

Speaking on ABC's "This Week," "Fox News Sunday" and "Late Edition" on CNN, Paulson defended the Federal Reserve's decision Friday to come to the rescue of Bear Stearns (nyse: BSC -

news - people ), the Wall Street investment bank most hurt by losses on trading in mortgage-related securities (See " Bear On The Bubble"). He said that in the risk to financial stability outweighed his concern about moral hazard.

[Ernest_at_the_Beach]

Related thread:

Fed Takes New Steps to Ease Crisis [Discount Rate Cut 1/4 Point]

[NormsRevenge]

moral hazard?

[Ernest_at_the_Beach]

Related thread:

Fed acts Sunday to prevent global bank run Monday ( Bear Stearns Taken over,...rates cut )

[the invisib1e hand]

moral hazard?

Yeah, as in, bailing out a company that doesn't deserve it.

[the invisib1e hand]

He said that in the risk to financial stability outweighed his concern about moral hazard.

This is a big statement. I don't know if I'm being overly dramatic, and I guess time may give a clue, but I think this is the sentence that caused the avalanche.

[Ernest_at_the_Beach]

This market was totally locked up....among other problems....:

Developments in the Auction Rate Preferred Securities Markets

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Wednesday February 20, 5:10 pm ET

DENVER--(BUSINESS WIRE)--Today, the Clough Global Allocation Fund (AMEX: GLV - News) announced that it has posted a commentary on recent developments in the auction rate preferred securities markets as it pertains to closed-end funds on its website at www.cloughglobal.com.

[NormsRevenge]

but but but..

Chrysler

Eastern Airlines

Savings&Loans

[Shady]

Ain’t gonna be pretty today in Lower Manhattan. Hold on.

[HeartlandOfAmerica]

The financial system, he said, was "more fragile than we would like right now."

THIS is talking the economy UP??? Vote of CONFIDENCE???

Where'd they get these dunces from anyways???

Sheesh.

[the invisib1e hand]

No, this is different. Apparently bear was double pledging its assets.

[the invisib1e hand]

the auction rate market has been locked up for weeks. there seems to be a capital shortage.

[the invisib1e hand]

Where'd they get these dunces from anyways???

Goldman Sachs, I think.

[NormsRevenge]

Thanks, that is a risky scheme.

[Ernest_at_the_Beach]

Tryiung to make some sense....More on AUCTION RATE PREFERRED SECURITIES (ARPS) – Securities issued by a ...

****************

They're coming out of the woodwork:
Investors who find our ARPs attractive.

**********************EXCERPT**********************

The problem with today's economy: It's not just one thing. Maybe we'll call it The First Cockroach Recession. As one problem gets solved, another emerges. When I kill one cockroach, days later another appears. Not getting the message? Read this piece from today's Economist:

If at first you don't succeed
The Fed tries to flush out the credit markets once again—but the stink lingers

Illustration by Satoshi Kambayashi

THIRD time lucky? The credit markets almost seized up in August, December and again this month and on each occasion the Federal Reserve has led a rescue attempt (see article). Its latest effort led to a bout of euphoria on Wall Street, with the S&P 500 index managing its biggest one-day increase in over five years on March 11th. But every time the Fed has unblocked the drains somewhere in the credit markets, they have bunged up elsewhere. Sure enough, on March 13th panicky investors sent the dollar tumbling below ¥100 and pushed gold above $1,000 an ounce.

The fear is that the financial markets have entered a negative spiral, the obverse of the kind of euphoria that drove dotcom stocks to absurd valuations in 1999 and early 2000. Back then, investors scrambled to buy shares regardless of their price. This time round, they are being forced to sell bonds and loans, whether or not they believe the borrowers will eventually repay. The problems are exacerbated by the demise of the securitisation market, and fears about counterparty risk. Both those factors are making banks less willing to lend—even to worthy borrowers. They will become ever more cautious the deeper America's economy tips into recession.

Debt, such an exalted financing tool a little more than a year ago, is now a four-letter word.

[Ernest_at_the_Beach]

Fed is printing more money....

[the invisib1e hand]

Thanks, that is a risky scheme.

Just remember, I said "apparently."

[HeartlandOfAmerica]

Wish they’d send him back then!

[ncalburt]

Bearns was heavily financially linked to the Carlye group

[Ernest_at_the_Beach]

I think I heard that Carlyle was leveraged like 22:1.....really exposed...I think they went Kaput...

*********************

Google turned this up:

*******************

Carlyle Group Doomed To Follow Enron: Is Hedge Fund Collapse Just Tip Of the 9/11 Put Options Scandal & 1700's Pirate Treasure?

Yes it did:

Opening Bell: The Great Hedge-Fund Unwind

**********************EXCERPT************************

The hedge fund Carlyle Capital all but collapsed last night, stunning investors with the speed of its fall from being one of the biggest-name investment vehicles spawned by the late credit bubble to its latest victim.

Bloomberg reports the public company said late Wednesday it has defaulted on $16.6 billion in debt after its banks withdrew their money from the fund. Carlyle’s pleas to its lenders failed to prevent them from issuing margin calls (requirements to put up more collateral for investment loans) because of the plunging value of Carlyle’s investments, which spiraled uncontrollably until it wiped out all of the company’s cash.

[sharkhawk]

Remember the Washington Mutual commercials making fun of all the old stodgy bankers? Maybe we need to go back and have some of those guys running the banks.

[HarryCaul]

Yeah, but Bear Stears did get effectively liquidated today...

[M203M4]

Thanks, that is a risky scheme.

Not as risky as it once was! Literally - this sort of activity on behalf of the fed goes directly into the mathematical models used to gauge risk. With every such action, the associated terms in the stochastic differential equations are modified in favor of accepting shakier manipulations. We are just watching that spring get wound up tighter and tighter.

[BlazingArizona]

Ain’t gonna be pretty today in Lower Manhattan. Hold on.

Monday morning's theme song on Wall Street: "It's Raining Men."

[aquila48]

“Fed is printing more money....”

But is it printing enough?

Let’s think about this a minute. Some complain that the fed is injecting too much money in the economy. But how much money has been “burned” out of the economy by all the losses that home owners, banks, shareowners, etc. have sustained. I would venture to guess that it’s well over a trillion... and counting - all gone from the economy. So if the fed is injecting money to keep the current situation from destroying even more wealth, is that bad? In fact, should it do even more? Do we want another great depression? Check out Friedman’s “Free to Choose” - he claims the depression happened because the fed did not do ENOUGH.

I really don’t know what the answer is. But it’s something I never hear addressed. I imagine given that we had a bubble, things were overvalued and that may have to be flushed out of the system, but as the bubble pops I hope we can do something so we don’t end up with the gum down our throat and choke on it!

This money thing is very complex... if someone in FRdom understands this stuff, I would sure like to hear from him/her.

[Fred]

2 dollars a share??? liquidation? what is the difference?

[M. Espinola]

"Fed is printing more money....

If the current currency trending continues, the ink the Fed uses to print the American dollar -- will be worth more, maybe a lot more.

Dollar plunges to fresh lows against euro, yen --again!

[M. Espinola]

"Fed is printing more money....

If the current currency trending continues, the ink the Fed uses to print the American dollar -- will be worth more, maybe a lot more.

Dollar plunges to fresh lows against euro, yen --again!

[Jack Black]

Fed is printing more money....

for all the extremely pedantic posters who have clogged up other threads on Friday with their sophmoric obsession with allegory-free postings it is hereby stipulated that the term "print money" is used herein as a convenient shorthand for the process of creation of additional debt based fiat money via the mechanism of ledger entries by existing member banks of the Federal Reserve System, and is not meant to imply actual printing of physical federal reserve notes by the US Treasury in every instance.

[ex-Texan]

Bear Stearns Insiders Unloaded 27,316,339 Shares in February !

Bear Stearns Stock Fell Dramatically Over the Weekend

Stock Sold for $ 2 Billion Profit at on February 14th

Insiders unloaded 27,316,339 Shares for about $ 70 + per share on February 14, 2008. For a profit of about $ 2 Billion ! ! ! !

What did they know and when did they know it ?

Bernanke and Paulson have a lot of questions to answer.

[HamiltonJay]

He said that in the risk to financial stability outweighed his concern about moral hazard.

And this liberal approach to fiscal policy is exactly why we are in the mess we are in.. Corporations get whatever they want, and we get screwed. Can't let them collapse, heaven forbid, they might not fund our next election campaign.

[Travis McGee]

Did you see on TV, Paulson was vigorously shaking his head “no no no” side to side, while saying our financial system is sound etc.

The conflicted body language was amazing. It’s worth watching.