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Should Wall Street Have Saved Itself?

RE: vboring

I remember Buffet and BKR looked at with disdain during the height of the internet bubble. They were as being behind the curve. Those who dissed BRK were wrong of course but they are still getting a billion dollar bailout after booking billions in profit from 2003 - 2006.

The lesson is simple, make money steady and slowly like BRK or be reckless enough to ensnare the sheeple and get out when the s&#t hits the fan.

TBTF is the new version of a early 1900's trusts; inevitable without regulation and destructive to capitalism in the end.

The JP Morgan-Bear Stearns Option Agreement

The shares are being bought by BSC bondholders who want to make sure this deal goes through. Apparently they are competing with stockholders who want to hold out for a better deal.

The bondholders risk losing money if this deal is rejected and BSC winds up declaring bankruptcy.

It Wasn't a 'Bailout'

to expand on drmalaka's right on post:

The flame out of Bear Stearns, while it wasn’t a bailout of shareholders, was a bailout of Bear Stearns creditors and counter-parties.

The current crisis is the direct result of the moral hazard created with the bailout of Long Term Capital Management (LTCM), in 1998 (more details below the fold). As with Bear Stearns, the shareholders of LTCM were NOT bailed out, but the counter-parties and creditors were bailed out. Thus, the Fed sent a message that if you lend recklessly to a hedge fund or investment bank, don’t worry, the FED will guarantee private contracts, as long as the lending is reckless enough to put the entire economy at risk.

The saying, “too big to fail”, directly and inexorably leads to the kind of reckless lending that crushed Bear Stearns and still threatens the US economic and monetary supremacy.

Who would lend billions of dollars to Bear Stearns unless they know, via the actions in 1998, that Bear Stearns debt would be backed by the faith and credit of the Federal Reserve? Rather then squelch the reckless lending that allowed for the current crunch, the Bear Stearns creditor bailout reinforces the LTCM lesson that as long as you lend to large enough institutions you need not worry about default and counter-party risk.
The problem today is that there isn’t enough money to bail out the entire system as LTCM was bailed out in 1998. In 1998, LTCM was the only over leveraged firm threatening the economy, now virtually all investment banks are over leveraged (and banks as well given Glass-Steagall;s 1999 repeal).

Had the FED and Wall Street allowed LTCM to fail, causing counter-parties a lot of financial pain, perhaps Bear Stearns would not have been allowed to borrow 3000% of their equity. Homeowners buying houses with zero equity is understandable as they are laypersons, Wall Street over leveraged precisely because of the backing of the FED as implied by their behavior in 1998. Just as Wall Street misjudged the severity of home mortgage defaults they are still misjudging the severity of their own over-leveraging.

Grab you hats, this roller coaster is still on the way down.