Thursday, March 27, 2008

My bad: The Economist shows me why I was wrong about Bear Stearns.

Yet another post on the BS anti-saga. This time, to remind me that I should keep up to date with my reading before posting stuff.

The Economist's Free Exchange blog has a wonderful post that shoots down my main alternative-universe proposal for what-the-Fed-missed-to-do. They get the mix of outrage (at the retelling of the story by Sorkin in the NYT) vs cool-headedness just right. And brevity. Definitely a good read.

First, two additional pieces of info:

  1. The week this all got started, "a complacent Bear Stearns went to the feds cap in hand, saying it would be gone by last Monday if help wasn't forthcoming." Dude! Could they be this cheeky? After what they did (didn't do) with LTCM in 1998?
  2. There's no need to speculate about how much BS's shareholders would have received had they gone to bankruptcy: $0. So even $2 was mana from the skies (or, more technically, $2 is infinitely more than $0). Quoting naked capitalism:
    It was going to declare bankruptcy Monday if there was no deal; its shareholders would have been wiped out. Why am I so confident of this view? If bondholders, as rumored, were buying shares to make sure the JPM deal went through (and thus would take losses on their stock purchases when the deal closed), that meant that they thought their bonds were worth well under 100 cents on the dollar in a bankruptcy. Shareholders are subordinate to bondholders, so equity owners would have gotten zilch.

So why am I doing a mea culpa here? Because of my suggestion that BS should have been nationalized. Quoting naked capitalism again:

I can think of a host of reasons, however, why the Fed did not go the nationalization route, the biggest being that it lacked clear authority (it couldn't declare Bear to be insolvent, as it could a member bank). And letting Bear fail (and having acsounts [sic] frozen) was what the Fed was trying to avoid, so letting it fail and then seizing control (even assuming it could do that) was never an option. No doubt, the central bank also did not want to assume administrative control of an entity that it had never regulated (ie, its supervisors had never kicked its tires) that dealt actively in markets in which the Fed has little expertise. Even in an orderly liquidation scenario, that it a lot to take on.

Doh! What was I thinking? The Fed can take over commercial banks, not investment banks without breaking half a million laws, right? (If anyone out there knows what the case is exactly, please drop a comment here.)

So perhaps I owe Bernanke et al and apology. I'm sure they'll be so happy to know that.

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