Passing Thought

I wonder why, if the Fed is willing to put my tax dollars on the line to back JPMorgan's 'cheaper than bankruptcy court' buyout of Bear Stearns, we're not getting more out of it, like maybe some jail time for the Bear Stearns executives who participated in creating this mess? Like maybe this guy?

March 15 (Bloomberg) -- Bear Stearns Cos. Chairman James ``Jimmy'' Cayne was playing in the North American Bridge Championship in Detroit over the past two days, the Wall Street Journal reported.

Cayne and a partner were placed fourth in a pair's event on March 13, the newspaper reported yesterday, citing the American Contract Bridge League's Web site.

The event took place while Bear Stearns Chief Executive Officer Alan Schwartz held a series of conference calls with company directors to discuss a cash pledge from the Federal Reserve and JPMorgan Chase & Co., the Journal said, citing unnamed ``insiders'' and people familiar with the matter. Cayne participated in at least some of the discussions, the newspaper said.

Cayne was playing the game yesterday as the investment bank's shares plunged, according to an unnamed attendee, the Journal reported, adding that Cayne declined a request to comment.

Cayne and partner Alfredo Versace finished fourth in a pair's event on March 13 with a score of 21.94, according to the league's Web site. The pair dropped to 26th place yesterday, scoring 42.87, the Web site showed.

I guess his stock price wasn't the only thing collapsing.

Meanwhile, Dean Baker explains why the bailout might not be a good idea:

The workings of the Fed and the financial markets can appear complicated, so let’s simplify matters a bit to make it more clear what is going on here. Suppose that it was suddenly discovered that much of the wealth held by the country’s leading financial institutions was in fact counterfeit. Instead of having hundreds of billions of dollars of real currency in their vaults, institutions like Citigroup, Merrill Lynch, and Bears Stearns actually had hundreds of billions of dollars of counterfeit currency. Suppose further that the public did not know exactly who held what in terms of counterfeit currency, only that all of them had a lot of it. (The point here is that these banks hold mortgage backed securities, many of which are only worth a fraction of their face value, and therefore can be viewed as the equivalent of counterfeit currency.)

In such circumstances, investors would be very reluctant to accept the credit of any of the major financial institutions. They couldn’t know whether most of their assets were in fact counterfeit, and they were dealing with a bankrupt institution, or whether the counterfeit currency was only a limited share of the wealth, which would not jeopardize the institution’s ability to meet its obligations.

This is in fact the credit squeeze that we’ve have recently witnessed. The spread between the interest rates on a wide variety of assets and the interest rate on safe assets (U.S. government debt) has soared. As a result, the Fed’s effort to stimulate the economy, by lowering the federal funds rate, has been largely unsuccessful because other interest rates have remained high.

In response to this situation the Fed today announced that it would lend $200 billion to banks and other financial firms, accepting mortgage backed securities as collateral. This is effectively the same as saying that the Fed is going to lend money to banks and accept the counterfeit currency as collateral, treating it just as though it were real money.

The intended effect of this policy is to convince other investors that the counterfeit currency is in fact real currency, or at the very least that there is a really huge sucker out there (the Fed) which is prepared to treat the counterfeit currency as real currency.

So how does this story play out? Well, insofar as the Fed is successful, the counterfeit currency retains its value for a while longer. This allows Citigroup, Merrill Lynch, Bears Stearns and the rest of the big boys more time to dump their counterfeit currency on suckers who haven’t figured out how the game is played.