"Bridge" Loan To Bear Stearns - Who's The Real Dummy?

So Jimmy Cayne was playing in a bridge tournament while Bear Stearns was going down the tubes. And now, two dollar bills are taped to his offices to make fun of the fact that the stock price has fallen to $2. In bridge, one player is always sitting on the sidelines and is called the "dummy."

Who's the real dummy in this game? Rumor has it that Cayne just completed buying his $25mm apartment in the Plaza in NYC so he must have his own rainy day fund. The federal government is using taxpayer funds to bail out Bear Stearns. Foreigners are buying so much of our financial companies that they feel it necessary to reassure us that they will not dictate policy. We, the taxpayers, are the dummy.

The genesis of the credit crisis goes something like this:

1. Create a climate in which people live beyond their means (advertise the good life, publicize celebrity excesses, make borrowing cheap): buy houses they can't afford and take stock market risks with their life savings -- and maybe buy with borrowed money.

2. Couple this with lenders eager and able to provide mortgages and debt to people who cannot afford them (charge upfront fees so lucrative that risk managers have no voice or are even fired, bundle the mortgages and sell the bundles so the lenders no longer feel responsible for their inherent flaws.)

3. Create complex derivatives that, though few understand them, can be sold into Main Street portfolios as well as held by sophisticated investors and encourage borrowing to buy the risky securities; and don't forget to include investments in shares of the companies raking in the profits from the scheme.

So when there is a hiccup in the housing market and prices stop rising -- as inevitably happens -- the house of cards collapses. The "dominos" are legion: homeowners get evicted, small investors get wiped out, tens of thousands of lower level workers in the financial industries get laid off and small businesses everywhere suffer as well. And CEOs who have failed to protect both the financial capital and the human capital walk away with giant severance packages. And we the taxpayers pay the bill. Déjà vu all over again. Just like last time with Long Term Capital and the dozens of times before that, only this time it is multiplied by thousands.

But these are just the mechanics. The root cause is greed gone wild -- with neither a sense of ethics and responsibility by the professional managers and boards of directors; and no institutional memory of the last time this happened. The rot goes beyond the financial industry. Think meat, imports from China, telemarketing and more. Whether it is by omission or commission it is still rot.

The accounting and audit industry failed to clean itself up and found itself with a much stronger involvement of the regulators. The financial industry may soon see itself with a new regulator: the IPA (Investor Protection Agency) or CPA (Consumer Protection Agency) -- with real teeth for enforcement. With an election not far off, this is not such a crazy idea any more and with each new regulation the law of unintended consequences always results in results we don't want as well as results we do.

I confess my bias -- I coach business owners and CEOs week in and week out. These are good men and women who are appalled by the behavior of their counterparts who besmirch the title and the position. It is time that the engine of this economy -- the small business owner and entrepreneur -- began to be a lot more vocal about the bad guys and more proactive about teaching the next generation the role of values. And it is time that the club of CEOs of large corporations used their power to restore values and trust before we see the government step in.

Comments

[outnow]

The foxes are still watching the henhouse so the hens are still getting eaten. Be afraid, foxes, someday, in the distant future, you may have your hen-eating privileges diminished. Ha, ha, ha.....so be a little nicer!

[nippersdad]

Great column, until the last paragraph where you admit your "biases" and bring up the old chestnut of self regulation as a viable alternative to Government oversight. Where have I heard that before.........

[Rule Of Law]

I hit send too soon:

So the question is: If these guys are so smart and ethical, why didn't they see this coming and exert their combined pressure to hep avert it?

And, from now on, let's be totally honest about those folks who got in over their heads. There is a climate of over-consumption, but the real key to being suckered in is believing the pitch of the Carny in the suit who is selling you the bill of goods, and that sales job started on us all the way at the top of the food chain. Now it's the little fish that will suffer, again, and who will be held accountable? Will your clients testify in Congress that the fix was in? I sorta doubt it.

[WIpatriot]

Rule, you so funny.

[Rule Of Law]

It's gotten to the point Patriot where it's either laugh or die, know what I mean...

[Rule Of Law]

Hey, these guys you coach are sharp guys, right? Like they don't see and know what's going on every single day? They don't do lunch and play golf with the very guys who are bringing this whole house of cards down around our heads? They don't all have the same MBA from the same Ivy League semi-pro system that gives them entree to the rarified heights of finance that baffle most of us mortal beings? And the best you can do for your first point is to perpetuate the meme that somehow the fate of Joe Mainstreet is caused by our own greed:

buy houses they can't afford and take stock market risks with their life savings -- and maybe buy with borrowed money.

Yeah, yeah, I know you say it's caused by a climate that brainwashes us--And I couldn't agree more! But, let's also throw in the notion that our citizens are actively dumbed down by an educational system that teaches them nothing bout the real world, much less who the drivers are at the wheel of the Economy. I've said it before--Americans are easily led babies who trust way too much, believe far too easily, and question not nearly enough. Were saps and dupes and rubes, and the 50% who voted for Bush seem to like it that way, while the rest of us get dragged along for the ride.

[Charles TW]

I found your article to be both informative and insightful. But I think a bettter title for it would have been:
"Yet Another Glaring Example of Supply Side Economics on Steroids". To we non-financial types the recent financial news reflect a dunderheadedness that borders on stupidity, if not criminality. By all appearances, America seems on course to not only trash an economic system that is the envy of all of history, but to don the cloak of the moral pariah of the 21st Century.
Instead of allowing market forces of supply, demand, and alternative fuels to set the price of oil, we deliberately start a war in the Middle East enabling fear and panic to drive up oil prices based upon arbitrary assessments of future supply. Pretty clever, huh? Produce less oil while leaving it to an inexhaustible supply of fear and panic to generate windfall profits that can only be described as obscene..
How about this one. A consumer buys a home at a set price and even a set interest rate. Unbeknownst to him or her their mortgages are packaged or bundled and sold to another lender where more interest in tacked on on. Each time the mortgage changes hands more interest is added on. Why incurr the costs of building more houses when we can find all manner of exotic ways to build upon an almost inexhaustible supply of interest possibilities at little more than the cost of pen and paper or an especially creative and imaginative software program? If the word "greed" comes to mind, you get the picture.
What is most galling in all of this is that Bush had it right the first time in terms of zeroing in on a solution. Putting money in the hands of the consumers is not the solution. But it will go a long way in balancing and stabilizing the problems until the best solution can be found. In baling out Bear Stearns, the President has indicated that he intends to employ his peculiar talent for snatching a horrid defeat from the jaws of a very real victory. Why keep pouring more money down the same rat hole? Why leave it to investors to generate demand through the arbitrary whims of supply side economics and run the risk of over producing what no one wants, when consumers are perfectly capable expressing their demands, when they have the dollars to do so. But, of course, we'll need a lot more, not fewer, consumers. 600 bucks a person won't cut ti. What we don't need is more of Wall Street and their self serving schemes.
Of course you are right, Mr. Baum. We the taxpayers are the real dummies. Maybe we will have smartened up by November.

[joebhed]

"It is time that the engine of this economy -- the small business owner and entrepreneur -- began to be a lot more vocal about the bad guys and more proactive about teaching the next generation the role of values. And it is time that the club of CEOs of large corporations used their power to restore values and trust before we see the government step in."
Ummmmm, excuse me.
Is this like, back to the future?
Cause I don't get it.
You seem to have previously laid out a decent scenario of the unfolding financial imbroglio, evidencing the fact that the high-paid CEO's failed miserably to have even a modicum of values and trust. Thus, today we stand frozen, on the precipice.
I am sorry but it is WAY past the time for corporate action "before we see the government step in."
The time for that was a generation or two ago when this same "financial services industry" demanded that bad old government get out of the way of the invisible hand of the free market.
It was in that unregulated environment that greed took over, and , pardon me for saying, but THAT was the group of corporate capitalists that brought us the law of "unintended consequences" of their actions.
It's kind of funny to me that this post is nothing but a lot of wishful thinking.
We wish it were not the greedy CEOs who made all the money and had the best house and things.
We wish it were in the corporate creed to instill values of economic sustainability and civic benevolence.
We wish the investors and the lenders prioritized and rewarded business virtue and corporate responsibility.
But, it ain't.
So, today, as you said, it's the same old corporate money-grabbing, only this time, its multiplied by thousands.
Again, it can only be wishful thinking that this is not only a proper time for direct government intervention(see Paul Volker on Charlie Rose), it is multiplied by thousands.
Since its not my job to teach CEOs how corporate life should relate to civic welfare, I call on the federal government to remake the entire financial system.
Abolish the FED.
Empower the people, acting through their Joint Congressional Committee on Currency and Monetary Policy to establish the sovereign Central Bank of the United States.
And let's get on with it, so this future can't be repeated.
And we can get back to some true free-enterprise.

[WIpatriot]

joe, are you advocating Congressional oversight?

I think that's where we have to start with oversight of our own.

[dadw5boys]

Property Appraiser over value the properties so the loans look great on paper.

They can loan more money against the high property value (which is not there) and still pass any inspection because of the loan amount / and property value keeps the risk low.

Low risk means the loan makers can get a higher percentage from the sell of the loans to investors because the properties value is so much higher than the money owed.

COLLISION between the Property Appraiser to make the loans look good is Illegal.

Where is the F B I and the RICCO ACT. THIS IS ORGANIZED FRUAD!!!!!!!!!!!!!

[dadw5boys]

COLLUSION BETWEEN THE PROPERTY APPRAISER AND THE LOAN MAKERS IS WHAT CAUSED THIS CRISIS !

WHERE IS THE F B I AND THE RICCO ACT??????

[WIpatriot]

"We, the taxpayers, are the dummy" is absolutely correct.

[robinhood1]

If I were Jimmy Cayne, I would have been better diversified. Who keeps so much of his wealth in the stock of one company? Of course, he may be a lot wealthier than the people at Forbes gave him credit for. Hopefully, he has a home in Israel, London and maybe Australia, along with gold coins just in case the crap really hits the fan. When the peasants are running through the streets of New York demanding bread, I wouldn't want to be living at the Plaza Hotel or 747 Park Avenue. Shades of Paris, 1789.

I wouldn't characterize the Feds' role in the Bear Stearns merger as a bailout. Think of it as trying to prevent a financial meltdown. Let's all hope the Feds succeed.

[nippersdad]

I view it this way: in microcosm, If the FED had not bailed out Bear Stearns and the credit markets had frozen up to the point where real economic pain was felt by the majority of the country, lots of "important" people would have gone to prison on racketeering charges. At $2.00 a share (paid by the taxpayer) the action was cheap at twice the price from their perspective.

Expand this out. In view of the 300 billion dollar bailout of the banking industry as a whole, and the ones that will no doubt be coming, there is no value high enough than can be put on having friends in high places. Success at such a price to the many for the few who can afford to buy twenty five million dollar apartments in New York: Priceless.

[Clinton]

Too late. They can't be trusted, the government needs to regulate them. But, since they own the government, they have nothing to worry about. They aren't decent people, they are sleazy crooks, nothing more.

[montemalone]

The small business guy of whom you speak is appalled because he/she does not head up a multi-billion dollar corp. that pays the CEO in the tens or hundreds of millions.
Each of them would do the same given the opportunity.
Greed is the problem.
I wish I could work as CEO for a year and cook the books and pay myself a fortune, then when the truth comes out, get fired and float down in my golden parachute.