When Bear Stearns crashed, the Fed decided to bail out first, ask questions later. It was a mistake that set a bad precedent.
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When Bear Stearns crashed, the Fed decided to bail out first, ask questions later. It was a mistake that set a bad precedent.

By Feux Follets following x   2018 Mar 14, 1:13am 129 views   6 comments   watch   sfw   quote     share    

This week (March 14, a Friday in 2008) marks the tenth anniversary of the first Federal Reserve System emergency loan to (or for the benefit of) Bear Stearns and Company. The parentheses are needed because that first loan technically went to JPMorgan Chase, which acted as a conduit channeling Federal Reserve credit to Bear Stearns.

Estimates at the time indicated that Bear Stearns had leveraged its capital up to 35 times going into its final crisis.

That is, the firm had no more than a 3 percent risk-absorption cushion during a period of increased market volatility. By Thursday night, March 13, 2008, Bear Stearns no longer could cover its liabilities as they became due at par value, which traditionally were established tests for the viability of any securities firm.

How one judges what happened next depends largely on one’s view of (a) how the financial world works plus (b) how loss absorption is supposed to work.

Financial market practitioners usually divide into two camps:

First, those who believe, somewhat cynically, that there is no difference between (a) and (b)—blame-shifting and loss avoidance are typical;
and second, those who believe that, however financial markets work, finance always should be held to traditional standards of good faith, fair dealing, and market-value solvency.

The Bear Stearns episode was a watershed moment in the unwinding of the 2008 financial crisis, whose main blows were reserved for September of that year. Too much financial, regulatory, and moral rot had been allowed to build up in the framework of financial markets after 1992, in an almost unbroken chain of smaller excesses leading to greater excesses, for one to say that, if the Bear Stearns failure been handled differently, then the fall 2008 crisis could have been avoided or at least rendered milder.

But it was clear at the time and became luminously clear afterward that the efforts to rescue Bear Stearns and its creditors paved the road to mishandling both that fall crisis and the subsequent recovery efforts.

Emergency Lending Before and After Bear Stearns

Emergency lending to large financial institutions, whose continued existence may depend on maintaining public confidence, usually carries with it the elements of secrecy and deniability illustrated by the quotation from Macbeth above.

Preserving plausible deniability is one of the supreme goods pursued in Washington whenever breaches of good faith, fair dealing, and market-value solvency are discovered.

So it is with emergency lending in America. The bedrock statute, now Section 13(3) of the Federal Reserve Act, even before its amendment in the Dodd-Frank Act of 2010, authorized the Federal Reserve’s Board of Governors, by a positive vote of at least five of the seven Governors, to declare “unusual and exigent circumstances” allowing the Federal Reserve Banks to make emergency loans to “individuals, partnerships, and corporations.”

From its inception in 1932 Section 13(3) restricted the collateral acceptable for such loans to the types that ordinarily were eligible for use at the Reserve Banks’ discount windows.

That eligible collateral usually was understood to be either United States government securities or financial paper arising from current transactions in commerce. Securities firms like Bear Stearns ordinarily did not hold enough eligible collateral to be of much use in a financial crisis.


#Economics #FinancialMeltdown #BearStearns #GroundhogDayTheFinancialMovieVersion

1   bob2356   ignore (1)   2018 Mar 14, 6:45am   ↑ like (2)   ↓ dislike (0)     quote      

Bear Sterns should have been nationalized. Along with any other bankrupt bank. Bailing out the banks was the worst of many extremely bad choices bush made.
2   Feux Follets   ignore (0)   2018 Mar 14, 6:54am   ↑ like (1)   ↓ dislike (0)     quote      

Let's see what happens in the instant replay which should be rolling into everyone's lives in the not too distant future.

Shouldn't be much of a concern though considering the captain and crew of the ship of state.

If you liked Gilligan's Island, then you love the real life version getting ready to play out soon.
3   drB6   ignore (0)   2018 Mar 14, 8:12am   ↑ like (1)   ↓ dislike (0)     quote      

bob2356 says
Bear Sterns should have been nationalized. Along with any other bankrupt bank. Bailing out the banks was the worst of many extremely bad choices bush made.

Or they should have allowed them to go broke.

Also, Obama was not less corporation-friendly than Bush, which left wing seems to forget, as no one can criticize St. Obama (similar how right wing now does not criticize St. Trump). See http://www.chicagotribune.com/business/columnists/ct-obama-economy-robert-reed-110-biz-20170109-column.html

Even before taking office in January 2009, Obama had signed on to the previous Bush administration's drastic, but politically unpopular, plan to directly infuse up to $700 billion in taxpayer-backed loans into the U.S. banking industry.

In the early days of his presidency, Obama also backed an estimated $80 billion bailout of the foundering American auto industry...the bailout ended up costing taxpayers about $9 billion, according to the Treasury

Obama also supported an estimated $800 billion economic stimulus package (or Porkulus, as some call)
4   HEYYOU   ignore (7)   2018 Mar 14, 11:19am   ↑ like (1)   ↓ dislike (0)     quote      

I'm agreeing with other patnetters.

When Obama & McCain left the campaign trail to vote & didn't demand that the FDIC place all the TBTF into receivership is the point where the Democrats & Republicans were owned.....by the Owners and didn't care who knew.
It's about the money & not politics.
5   drB6   ignore (0)   2018 Mar 14, 11:22am   ↑ like (0)   ↓ dislike (0)     quote      

I'm agreeing with other patnetters

a problem requiring visit to doctor right there
6   TwoScoopsPlissken   ignore (2)   2018 Mar 14, 11:24am   ↑ like (0)   ↓ dislike (0)     quote      

bob2356 says
>Bear Sterns should have been nationalized. Along with any other bankrupt bank. Bailing out the banks was the worst of many extremely bad choices bush made.>

And continued by Obama and the Democratic Congress, who could have cancelled these programs.

Obama was actually elected to do so, but with Citigroup vetting his Cabinet via Michael Froman, with Podesta as go between, his admin came up with a Grand Distraction that was built to put yet more money in the hands of Big Business, the ACA.

It's funny that people will say "Obama couldn't do nuthin" about the banks as the primary executive in charge of national financial regulators and law enforcement, backed by a Democratic Majority large enough to pass ACA without republican votes.

Keep this in mind: Obama and the Dem Congress was elected not longer after Bush started all these Bailouts.
They had enough energy and votes to introduce a massive new health program and pass it without Republican votes,
But their defenders claim they couldn't have modified the Bank Bailout Schemes.

That's nonsense.

I won't even get into HAMP, the most underutilized Government Program marketed by Democrats in history. Since compliance was voluntary.