Wall Street investment bank Bear Stearns is in trouble. Another bailout by the Federal government, which is willing to bail out any high flying investment firm but not the little guy, has occurred. They were prompted to do this by a good old fashioned run on the bank. Just as in Mary Poppins, investors were calling Bear Stearns and demanding their money. Poor Bear Stearns. They had already suffered the collapse of two of their hedge funds tied to the sub-prime mortgage mess. Leveraged 30 to 1, it could simply not give everyone who wanted it their money back. So good old Uncle Sam, stingy when it comes to health care or social programs to help the poor, just couldn't say no to Bear Stearns and its investors. We can't have high flying capitalist investors losing money now, can we? Good old Uncle to the rescue. At these stratospheric levels they call it a liquidity crisis. At the level of the average consumer, they call it being too poor to pay your bills. It amounts to the same thing. The greedy capitalists lost their bets. Tough tittie. Let them go out of business. Let them lose their asses. Let Bear Stearns and its hedge fund investors fail. They were "all in." Now they've crapped out. Who cares? Another day in the life. But the government bails them out, thereby taking on trillions of dollars in increased liabilities (to the taxpayers, that is), in addition to the trillions of dollars it throws down the rat hole in Iraq, but is too poor to take care of its veterans not to mention its homeless veterans or poor people seeking health care.
Bear Stearns, squeezed by the sub-prime crisis, needs an emergency loan. Its stock plunges, and wariness grows.
NEW YORK -- The battered global financial system looked a lot more fragile Friday as one of Wall Street's biggest investment houses was forced to get an emergency loan from the Federal Reserve, raising the specter of more giant securities firms laid low by the global credit crisis.
Bear Stearns Cos. said its ability to finance its operations had "significantly deteriorated" in the preceding 24 hours, compelling it to borrow an undisclosed amount of money from the Fed.The disclosure sent the stock market down sharply and underscored how vulnerable the global financial system has become since a wave of defaults on home loans given to people with bad credit led to the collapse of the sub-prime mortgage market.
Bear Stearns is heavily exposed to faltering securities tied to sub-prime mortgages, and as credit markets seized up in recent weeks, confidence waned that the company would be able to make good on its own obligations.
That triggered a classic run on the bank, with clients pulling out money and other financial firms refusing to do business with the company.
"A lot of people wanted to get cash out," Alan Schwartz, Bear Stearns' chief executive, said in a conference call with analysts.
A lack of confidence is undermining much of Wall Street and is threatening to become a self-fulfilling prophecy that could intensify the country's credit squeeze, doing more damage to an economy that many experts say is already in a recession.
"This transcends Bear Stearns," said Bruce Foerster, a Wall Street veteran and president of South Beach Capital Markets. "It shows the fragility of all these institutions, particularly investment banks and commercial banks."
Bear Stearns' stock plunged $27, or 47%, to $30. It has plummeted 79% in the last year.
It's that nasty old sub-prime mortgage mess thats at the root of all the trouble. Wall Street cleverly securitzed all that debt and sold it off as bonds to investors, something it couldn't have done if Franklin D Roosevelt's New Deal had been left in place. But Rush Limbaugh, among others, is trying to do something about that - FDR's New Deal, that is. In others words Republican types are conscientiously seeking to destroy it, something they managed partially to do by pressuring "triangulating" Clinton into repealing the Glass-Steagall Act that put a firewall between commercial (think mortgage) and investment (think mortgage backed securities) banking. So it was off to the races for the know-it-all, Wall Street, super hip capitalist bankers and hedge fund types. Oh how high did they fly - for awhile - making millions and billions of dollars. Consider the Forbes Fortune 400 list - hedge fund managers galore. Now they're crying crocodile tears to the Fed and the Federal Government - two different entities, but totally incahoots. Oh well, if you make $100 million a year, you only need to work one year anyway.
Bush says the economy is having a "tough time", but not to worry. If the sky were falling, Bush would call it a "tough time." "Never let them see you sweat" is his motto. But wait a minute. These Wall Street guys are smarter and wealthier than Joe Six Pack. So they deserve to be bailed out, don't they? After all Joe Six Pack is an average slob who will be satisfied with the $600. bread and circus money Bush is prepared to give them.
Robert Reich has a blog in which he says all the Fed bailouts in the world won't work. Can't put Humpty Dumpty back together again. Some are even calling for more regulation. Oh how that word grates on the nerves of true conservatives. Maybe FDR had it right the first time. Think they might call for a reinstitutionalization of the Glass-Steagall Act? Not on my watch, says Bush. Ronald Reagan (remember trickle down economics?) would roll over in his grave. The Bush-Cheney plan was to leave the Democrats the biggest economic mess of all time when they took over in '09. It just didn't quite work out that way. The shit hit the fan altogether too early. Now they're trying to fix the economy with spit, glue and bailing wire, sort of like how the Okies fixed up their jalopies when they left the dust bowl for California in the 30s.
Robert Reich says: "The Fed bailing out the big banks is like someone with a helium tank blowing more air into a leaky balloon. It only postpones the inevitable, which is that the balloon will lose its air and float back to earth. For markets to work again, speculative bubbles have to burst, one way or another." I like that metaphor! Like blowing hot air into a balloon with a hole in it. Tough, indeed, Mr. President. But you don't have a clue, and if you did, you wouldn't let it puncture your macho bravado that can't admit that you and all your neocon, feed-the-rich-soak-the-poor cronies were just plain wrong about the economy, the war in Iraq and just about everything else, both philosophical and practical, that you've laid your hands on or spouted out of your mouths for the last 28 years.
I say let Bear Stearns go out of business. Let all the Wall Street, let's-make-money-out-of-money types go out of business. Let's get back to the basics. Screw the "financialization of America." Derivatives don't put food on the table. I say strip the hedge funds from the economy. Get rid of most of Wall Street and get back to basics. Put the strictly financial types, who are parasites of capitalism, out of business. If a business doesn't serve the needs of the people, it shouldn't exist! People that provide real goods and services should be encouraged. People that make money off of money should not. They're only turning the economic system into a casino! I noticed that the high gas prices aren't due to lack of supply (remember the first law of capitalism: the law of supply and demand). They're due to investors in the commodity market for oil taking their money out of shaky Wall Street investments and bidding up the price of oil. Hey, if trading oil on the commodities market were made illegal, we wouldn't have this problem. What's wrong with oil suppliers selling directly to oil companies selling directly to consumers. Too many middle men. Get rid of the traders. Then all that would determine the price of gas would be real supply and demand, something that the OPEC cartel carefully controls. Either way we're screwed.
From an article in the San Diego Union, March 15, 2008, entitled Fed Acts to Rescue a Major US Bank:
Firms such as Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with one another every day, borrowing and lending securities at a dizzying pace.
The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business.
Hedge funds that rely on Bear Stearns to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear Stearns would be at risk; and markets that depended on Bear Stearns to buy and sell securities would screech to a halt, if they were not already halted.
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The demise of the hedge funds began what has been a slow but persistent loss of market confidence in the bank. Such an erosion can be devastating for any investment bank, especially one such as Bear, which has a leverage ratio of over 30-to-1, meaning it borrows more than 30 times the value of its $11 billion equity base.
“The public has never fully understood how leveraged these institutions are,” said Samuel Hayes, a professor of investment banking at Harvard Business School. “But the market-makers understand this inherent risk. This is a run on the bank, just like Long Term Capital Management, Kidder and Drexel Burnham.”
