Redstate

Of course, the media is too savvy to say it outright.

...but I hardly think they'll be WalMart greeters anytime soon.

It's a commercial bank in Delaware. According to some research I did, they appear to have lost close to $2 billion on their holding in Bear Stearns stock.

This interests me for non-personal reasons.

n/t

http://money.cnn.com/news/newsfeeds/articles/djf500/200803171220DOWJONES...

I knew he was a Bear guy from way back. I had a bad feeling when he skipped the Saturday-morning radio talk show he normally does for the local New York audience.

His substantive point is that the Fed should have opened its discount window to broker-dealers at the same time that bank deregulation permitted commercial banks to re-enter the investment banking business.

There's been a lot of theoretical noodling about this in recent days. The idea behind having the Fed backstop the banks with emergency liquidity is essential because of their role in the payment system. Nothing similar applies to broker-dealers because they don't take deposits from the public.

But they definitely play a role in the smooth functioning of the global economy because they're deeply embedded in the money markets. And much if not most commercial lending comes from the money markets instead of from banks these days anyway.

So Larry has a point. There's more to the discussion, of course. Maybe later.

Both the Bank of England and Her Majesty's Treasury have long traditions of direct intervention in the banking system, even to the extent of nationalizing credit and market risk.

The European Central Bank doesn't have a long enough history, but the long-standing traditions of national central banks in Europe are basically the same as in Britain.

In America, this kind of behavior is extremely untraditional. The Fed did move fast in the Bear Stearns case, but there was no nationalization and no bailout. Confronted with Northern Rock, it's nearly inconceivable that the Fed would have done what Alistair Darling did, with or without five months of lead time.

and wish the BoE had chosen the same route. However I think there were concerned it might be illegal. Certainly they felt constrained by European law on state support.

The best thing about Bear has been that there wasn't any political interferance in rescue as far as I can see.

No political interference? Just what was Paulson doing all weekend if not interfering?

I have been working overseas for most of my life, and have had a lot of interaction with Brits because of that. They have always had difficulty with the concept on an independent Federal Reserve system; that the Fed is NOT a government agency.

What the Federal Reserve have done is to prioritize the liquidity crisis (which is being accompanied by a recession) as near-term urgent, and the dollar/inflation problem as medium-term urgent.

They're walking the edge of a knife, and they know it too. That's why senior Fed officials have occasionally warned people not to be surprised by a sudden large jump in interest rates when the credit problems abate.

You might respond that while lower interest rates are a good tool to address traditional recessions, they're not so good for liquidity problems caused by de-leveraging.

And you'd be right.

problematic.

Rates decline rapidly. Small investors, especially retirees, see the yields on their money market funds and short-term CD's drop. They go yield hunting in longer term fixed income products. Depending on what they buy, their principal is at risk when rates rise, and most will be caught by surprise when they do rise.

...for clearing that up for me. I understand about half of what you say in your blogs so I appreciate it even more when you put complicated economics into laymen's terms.

www.scottbomb.com

I know I'm sidestepping your question, but boom and bust cycles are far more mild now than in the past.

As recently as the Sixties, when much of the economy was still manufacturing-based, a cyclical recession would see great numbers of people lose their jobs. That's real economic pain.

Before the modern Fed came into being (more or less the mid-Thirties), recessions were even worse. In the 19th century, slowdowns often stretched out for years. (Hence the then-common term "depression.")

there has been a lack of self-regulation or restraint in the risk valuation system. Maybe we are simply making the process too complicated. I took several levels of econometrics and was routinely baffled. Even the professors were often baffled. At the end of all the pain, I came away thinking that you can derive any answer you wish depending on how you build your model. There doesn't seem to be an "underwriters laboratory" for these sorts of models, so they are susceptible to pressure. Hmm. I'm not sure that makes any sense.

stamp out stupidity and greed, start believing in and striving towards the perfectibility of man? Those are all ideas. I'll leave it to blackhedd and the others more well versed in the arcana of economics to say what if anything should be done over instruments like the MBS at issue here. That said, this simple peasant had no trouble foreseeing and staying out of the way of the '86 oil crash, the dot com bust, and the housing crash. I say that only in terms of the only economy that really means anything to me, my personal finances.

All it took was a peasant's good sense to see the oil prices supporting the wildly booming Alaska economy were starting to fall and that meant it was time to leave the party NOW, Now while you can shed things for something like what you want them to be worth, not two cents on the dollar. Sold an expensive business, expensive house, and an expensive car in Anchorage in the late fall of '83; never could have been worth more, a couple years later the business was gone, the house had lost over a third of its value, and the guy who bought it had had to sell the Porsche.

Same thing with the dot com bust; we'd have made some more money perhaps if we'd have stayed in agressive stocks longer, but if you stay too long, you can't get out. Now I know that knowing how to stay to just the right moment to get the most out is what distinguishes peasants like me from multi-bazillionaire stock traders, but I'm fine with what I have.

And finally, who with a brain speculates with the house they live in? If you HAD to use a mortgage to get the house, you can't afford to "fix it up and flip it," you've already paid pretty much what the market would bear for it, and unless the inflation keeps spiraling, you're upside down the minute you take possession. The one thing you can be sure of in a boom economy is that there is a bust coming. Speculating in houses or stocks or tulips is only for people who can afford to lose whatever money or property they're speculating with; it's like going to a strip joint: never ever go in one with any money you're planning to have the next morning and leave the debit and credit cards behind too.

The bad thing in both the dot com and housing bust is that lots of people convinced themselves that they were players and it is they who got shucked. People living on wages and in mortgaged houses simply don't have enough wealth to speculate and they should stay out of speculative activities unless they can afford to lose whatever they're playing with. But that's just a peasant's point of view.
In Vino Veritas

Oh boy is he screwed. Wowza.

I'm one of the people that are guilty of making the point about the 1.2 or 1.5 billion dollar building (take your pick, as regards the valuation of Manhattan commercial space). But that doesn't mean $2/share was the wrong price.

For one thing, the acquisition involved taking on a large amount of risky assets with only one very nervous weekend to do due diligence. Under the circumstances, there's no way Morgan could have done a proper valuation so they had to err on the safe side.

For another thing, Bear had to sell the company or face a bankruptcy (which would have wiped out shareholder equity anyway).

And on Wall Street, whenever anyone has no choice but to sell, the price is always going to be brutal. That's human nature, you'd do the same thing.

I was expecting the acquisition to value the common stock at exactly zero. When I saw the $2 price, my first thought was that Morgan did that mostly to keep Bear's top execs from being totally humiliated. And that matters a lot, as you know if you've ever been in a really tense negotiation.

...Fed announces the rate cut. ("Buy on the rumor, sell on the news.")

The mortgage market depends much more on how the 10-year Treasury note (which the Fed has no control over) interacts with the bonds issued by Fannie Mae and Freddie Mac.

I could be proven wrong tomorrow, but it looks to me like mortgage rates will continue to rise. The 10-year T is priced extremely high right now.