pixelm

Backroom Bear Stearns Deal Exposed

It is time to put the "moral hazard" nonsense to bed. This red herring has been proclaimed so loudly that even Mr. Paulson cited it as the reason why the price for Bear needed to be "low". Let me ask the investors here whether their analysis has EVER assigned any weight to the concept of: if I invest here, and it goes really bad, at least the Fed will bail me out". Of course not, because by that time not only your own investment, but everyone else's investment in an entire industry sector must be at risk of collapse AND you'd have to have some idea about the political environment at that hypothetical point in the future and a ton of other speculative and contingent factors would have to converge. If there is an investor out there so smart as to have predicted all those things - she almost certainly wouldn't have been buying bear stearns common just prior to the meltdown in the debt markets. If moral hazard is a problem, perhaps it's at the much more predictable level (i.e., if there is a recession, interest rates will drop) - certainly NOT at the level of "if there is a recession, and house values drop, and lenders lend too much to households using house values as security, so people can't value collateralized debt obligations, so markets lose confidence in investment banks that have exposure to cdos, the fed will bail out my equity investment at 4 cents on the dollar". Any impact of such an effect on investment activity simply has to be de minimus