Posted on 04/03/2008 9:22:59 AM PDT by TigerLikesRooster
April 3, 2008
Ben Bernanke admits Bear Stearns was hours from collapse
Dearbail Jordan
US Federal Reserve chairman, Ben Bernanke, today revealed that Bear Stearns was just one day away from going bust when the central bank stepped in to save the Wall Street bank to prevent chaos and a "severe" impact on confidence.
Speaking for a second day in front of US Congress, Mr Bernanke attempted to justify JP Morgan Chase's rescue of Bear Stearns, in a deal that included the US Fed agreeing to back $29 billion of the troubled investment bank's assets.
Mr Bernanke said: "... on March 13, Bear Stearns advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and that it would have to file for bankruptcy the next day unless alternative sources of funds became available."
The Fed chairman said that the central bank was forced to step in because the US financial system is "extremely complex and interconnected", and the collapse of Bear Stearns would have led to a "chaotic unwinding of positions in those markets are could have severely shaken confidence".
Mr Bernanke added: "Given the exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain."
JP Morgan Chase agreed to acquire Bear Stearns for an initial $2 a share, valuing the lender at just $240 million. However, an investor outcry forced JP Morgan to increase the offer to $10 a share, as well as taking on $1 billion of Bear Stearns' assets with the remaining $29 billion backed by the US Fed.
Jamie Dimon, chief executive at JP Morgan, who was also appearing before Congress today, said the bank would not have offered to buy Bear Stearns if the Fed had not agreed to back the assets. His co-speaker, Alan Schwartz, chief executive at Bear Stearns, said today that the bank was not involved in negotiations between JP Morgan and the government regarding the $30 billion asset deal.
Mr Schwartz also maintained, as he said days before Bear Stearns nearly went bust last month, that the run that brought the lender to its knees was due to a lack of confidence and not because of a lack of capital or liquidity.
Mr Bernanke today reiterated his forecast that the US economy would slow in the first half before staging a recovery in the second half. However, like yesterday, Mr Bernanke refused to label the current economic situation as a recession.
It emerged today that US unemployment claims unexpectedly spiked last week by 38,000 to the highest rate since September 2005, alarming investors ahead of monthly jobless figures due out tomorrow.
New data revealed that the number of unemployment claims rose to 407,000 for the week ended March 29, above an expected 370,000 and the previous week's total of 369,000.
The sudden rise in benefit claims sent the Dow Jones industrial average down 48.6 points at 12,556.7 as investor grew nervous that today's figures are an indication of employment numbers that are due out tomorrow that are expected to show non-farm pay rolls for March have fallen by 60,000.
http://www.fgmr.com/morgan-enron.htm
Read this - you will find it interesting.
All the more reason the bailouts and obfuscations papered over by the SEC and the Fed need to stop.
So you vote for fascism, cronyism, and bailouts by taxpayer dollars ?
We deserve what we get - it’s no wonder our leaders are so corrupt. All the people want is to be given a lollipop and a pat on the head before going back to sleep to get fleeced by the “elite”.
Marking to market would cause a TU condition in the financial markets and bankrupt governments of any overleveraged parties, but we'd all come out better and more honest on the other side.
The Fed acted to save all the ordinary people whose finances would have been decimated by this. The Fed didn’t give a crap which big financial institution got a windfall, but they only had one choice because only one institution was willing to commit to a deal on such short notice. This was an emergency caused by Bear Stearns, which for all practical purposes no longer exists (i.e. the guilty reaped what they sowed).
JP Morgan will probably end up with a nice fat profit on this, but nowhere near the amount that the individual taxpayers would have lost had the deal not been done. The Fed may well not end up spending a penny of taxpayer money on the deal — they gave a guarantee to pay IF Bear and its counterparties end up unable to pay. But even if the Fed ends up having to pay out the whole $29 billion of the guarantee, that’s a drop in the bucket compared to the hit that ordinary taxpayers would have taken without this deal.
To use a simplified scenario, the Fed was faced with a choice of 1) promising to tax you an extra $100 dollars IF the guarantee ever needed to be paid, in order to get the JPM deal done, or 2) sitting back and watching the global financial system undergo a total collapse, which would cause the value of your house to drop by about 50%, the value of your retirement savings to drop at least that much, and the unemployment rate to skyrocket, possibly costing you your job. Would you really have preferred that they choose option 2?
Agreed. I found this following quote from JPM most interesting:
“We don’t have any real exposure to gold.” Perhaps in your investigation you can ask him to define the term “real”.
Without transparency, the fat cats can pull some amazing stuff and leave the rest of us holding the bag.
If the "value" of our investments can be wiped out that easily, then it is not a real valuation. It is a fantasy and will find it's true valuation in short order. You think there aren't many more Bear Stearns out there that just have not come to terms with reality yet? You think the mortgage crisis is over? How can the global economy be so robust and strong and yet so fragile at the same time?
It can't. It is an illusion. It is just a matter of time.
I have a close friend who is in bankruptcy right now.
The reason that the pain of bankruptcy is limited, is because the government steps in and keeps you from getting completely crushed by the effects of your own mistakes.
That's what the government was trying to do by backing some of Bear Sterns assets, but they weren't really doing it for Bear Stearns. They were doing it because they were worried about a complete collapse by Bear Sterns might cause people to pull their money out of investment banks on a huge scale. Not just Bear Sterns, but all investment banks.
If there's a run on banks, we end up with another great depression. The Fed is trying to instead soften the blow caused by people's overzealous risk taking, and tone down the effects to stagnation or a short recession, rather than a repeat of the great depression.
What the fed is doing kind of resembles how the government protects you during bankruptcy.
You are obviously not a student of any past depression. You also missed some testimony. JPM was the ONLY bank offered the opportunity to buy BSC. Wonder why, or you don’t care ? Did you know that Jamie Dimon is a governor of the NY Fed ? Do you know who he is ? Did you think to ask what side of the table he sat on during the “negotiations” ?
Even that idiot Dodd got it right - What the Fed is doing is privatizing the profits, socializing the losses. We are living under a fascist economy, and it won’t change when the next administration takes office. Both the Republicans and the Dems are in it up to their eyeballs.
And yes, option 2 is far preferable IF it means we can finally get the transparency that is so necessary in our financial system. Don’t you care about life, liberty and the pursuit of happiness ? Or are you more interested in your comfortable existence where you eat your hamburger every nite and fall asleep to American Idol ? As the Founders said, if we trade freedom for security, we are lost. Your post is proof of that mentality - just let the Fed hide the bad stuff so you don’t have to bother your pretty little head over it.
And finally, the average American’s retirement and everything else they hold as an asset is already under assault. Inflation is heating up in the energy and commodity sectors, house prices are dropping like crazy, and the demographics of the boomers will ensure the market doesn’t recover in the next 10 years or more, unless you favor a greatly inflated immigration in years to come. You can’t trade the market because it is so manipulated by the Fed and other major institutional insiders that it has become quite irrational. Explain Tuesday’s 400 pt rally. What fundamentals or news showed up on Monday or Tuesday to justify such a thing ? Social Security and Medicare are a joke, especially after this year when every one of the Presidential candidates favors amnesty and giving SS and Medicare to the illegals.
No, unless we get back to no corporate welfare, allow those highly leveraged individuals and institutions to fail and take their losses, and start promoting honesty and ethical action, there is no USA. We are no better than the USSR. Welcome to socialism, comrade.
My house has already dropped maybe 10%, my retirement is as secure as I can make it because I’ve paid attention to the economy, I have no debt because I don’t live above my means, and I know we would suffer short term pain but long term we wold be so much better off.
Short term pain, long term gain. Instead, just like Japan we’ll have short term “stability” with maximum long term pain.
Knowing JPM what they probably meant was they were both long and short gold.
The “elite” are rearranging the deck chairs for their comfort while j6p has a very uncomfortable time in steerage, but I believe in the end we are all in the dumper unless transparency, honesty and ethics once again are a hallmark of our government and economy.
Amazingly enough, we survived the depression, and many people came out a lot stronger. Debt was minimal, people learned what was important, and they all learned that actions had consequences.
Instead, the nanny state has decreed that the very people responsible for the mess, who are the Fed, the IBs, the commercial banks, the monolines, the ratings agencies, and the government oversight agencies, will be bailed out by joe taxpayer. The bank execs are still pulling down their multimillion $$$ salaries but joe taxpayer sees a huge increase in daily expenses and joe taxpayers children and grandchildren will live in a country that will either 1) be so underwater in debt that we inflate our way out of it or 2) we default on our debt and we become just another failed state with citizens paying the price in prosperity.
You miss the entire point. If failure is not an option, then no consequences occur and no lessons are learned. Has JPM accepted any further regulations to the effect of unwinding their derivatives positions, deleveraging, bringing crap back on their balance sheets, running a transparent business so their shareholders don’t wind up paying for management mistakes ?
No. There were no consequences to anyone other than BSC shareholders and lower-level employees. Did these people deserve to pay, or should the a$$hats in management who approved the overleveraging been the ones to pay ?
Welcome to the nanny state, where people making 7,8,9 and 10 figure salaries and bonuses are considered worthy of bailouts. God, this stuff makes me sick.
I think that the main question is going to be, HOW bad is it going to get? My hubby and I are doing what we can, but planning for the fact of a future worthless currency with a young teenager growing up to care for, well, I just wonder how much us “little people” can really do. Some, but enough? Time will tell.
Treasury Agrees to Absorb any Losses to the Fed from Bear StearnsVideo from CNBC (hat tip idoc)
CNBC's Steve Liesman reports on a letter from Treasury Secretary Paulson to New York Fed President Tim Geithner (PDF). In the letter, Treasury agrees that the Fed can bill Treasury for any losses from the Bear Stearns deal.
You might be interested in this, nully. (My post #52.)
That’s the question we can’t answer, because it seems like anytime we get closer to an answer the Treasury, the Fed, or Congress steps in with taxpayer money, ie adds to the debt.
All I can say is, have cash, lay in some supplies, get rid of debt, and keep any retirement or other investment funds in whatever you think will weather the storm and out of the clutches of the taxman.
Pretty much have those bases covered. Just the mortgage,(bought seven years ago), paid off credit cards, slowly building up some supplies and got the 401K in the best places we could find within the employers confines.
The government is certainly not here to help us, its here to help itself.
I’m heavily invested in torch, pitchfork, noose rope and ammo manufacturers.
Anybody who bought Bear stock not too long ago at $150 a share knows that, in fact, it did fail.
Heck, ya can't even build a john without conforming to a whole rat's nest of federal regulations.
Everything from how much water it can flush, to how wide the door is, to where you stick it...
Hmmmm. First you say you don't understand it, then you show that you do understand it...
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