Britney and the Bear: Who Says You Can't Get Good Help Anymore?

What do Wall Street and Britney Spears have in common? Right -- both are overpaid, for all their undeniable talents. More strikingly, though, both have recently been stumbling from crisis to crisis.

There the resemblance ends. If one credits press reports, the unfortunate Ms. Spears resists getting help -- she sent Dr. Phil packing. By contrast, Wall Street recognizes when to switch off the free market rhetoric and throw itself at the feet of a real doctor, in this case, Dr. Ben -- Ben Bernanke, Chair of the Federal Reserve's Board of Governors. When Bear Stearns suddenly became Bare, Stearns and needed to be rescued, Dr. Ben obligingly waived both law and precedent to extend the Fed's safety net to cover an investment bank. He took over $30 billion of the junk in Bear's portfolio for the Fed's own account, so J. P. Morgan Chase could mount its first offer to buy out Bear. Then the Fed hired BlackRock, a large hedge fund, to run these assets, presumably in exchange for yet more public money.

Because Bear's stockholders have been squawking, the terms of the buyout are being renegotiated. But nevermind details -- the principle is already all too clear. Almost every day brings new evidence of the involvement in the deal of Fed Chair Bernanke, Treasury Secretary Paulson, and New York Fed President Timothy Geithner.

It is high time for someone to start raising questions about the public interest here. The caterwauling from Bears' shareholders about price is overshadowing a critical point: Since the first deal was announced, J.P Morgan Chase's stock has rallied smartly. With its enormous market capitalization, that translates into a gigantic increase in market value. If the deal unravels, the stock price might -- indeed, almost certainly will -- fall again, but that is precisely our point: markets considered the deal that the Fed and Morgan tried to cut a very good one for Morgan.

The question that needs to be asked is why none of that increase in value is ever to flow back to the public, whose money is critical to the deal. This would be easy to arrange and it does not risk reviving the Soviet Union's Gosplan: the Fed or the federal government could simply have taken some stock in J.P. Morgan Chase. Or, as in the Chrysler bailout, there could have been warrants issued, guaranteeing the government the right to buy stock at a low price. At some point in the future, when J.P. Morgan Chase's management and investors are again comfortable lecturing the rest of us about the magic of the marketplace and the urgent need to cut the size of government, the stock or the warrants could be sold off or redeemed, to pay for the rescue.

The New York Times recently revealed that Barney Frank, Chair of the House Financial Services Committee, only lately discovered how lightly regulated financial houses were. This came in the course of a conversation with Chuck Prince, the now departed head of Citigroup. Congressman Frank's learning curve needs to steepen and he needs to widen his circle of advisors. Only a few weeks ago, he asked one of us what difference it would make if bond insurers went broke. A few days later, the Port Authority of New York was paying 20% for money because of the weakness of those bond insurers. Democrats like Mr. Frank and Senator Christopher Dodd, who chairs the cognate Senate committee, often talk up the virtues of the New Deal. But both have been consistently behind the curve on the bailout. So have all three presidential candidates. There are reasons for this, and not all of them are edifying: One, alas, is surely political money.

But this is a topic for another day. For now, it is time to insist that these putative champions of the public interest walk the walk, as well as talk the talk. We have not seen the last bailout in this crisis. If the public is going to pay for them, as we think it must, it should also get paid back for them. During the New Deal, the Reconstruction Finance Corporation commonly took preferred stock in banks it rescued. So should the federal government when it bails out Wall Street. The Federal Reserve has got to stop providing free lunches to people who have told us for years that there is no such thing as a free lunch.

Comments

[dadw5boys]

If the People buy out a failed loan then the People get the deed to the property!!!!!!!!!!!

NO DEED NOT BAILOUT!! SIMPLE AS THAT!

The deed goes to the U.S. Government.

They don't get the money and the property too!!!!!!!

[Novista]

Serious question: how did the RFC benefit the ordinary U.S. citizen?

Also: How is everyone so certain Bear Stearns is/was worse off than any other derivatives pusher? Seems to me (a) no bank now, of whatever ilk, trusts another. Maybe rightfully so, And (b) the whole mortgage market of the past ten years. Yes, the boom started in 1998 and by three years time, median house prices were 50% higher. Then easy credit did the rest.

Now. Since you cannot have morgtage backed securities without mortgages, I suspect many from the 90s were sold on, probably from responsible lenders who've kept up payments. So no one knows really what might be in CDOs and other 'creative investment vehicles', right? And since the Fed had its grubby paws on some of this paper, the simplest answer is: start unwinding, one CDO etc. at a time.

Sell whatever whole mortgages are revealed, back to the issuing banks. Put the funds in an escrow account on behalf of said CDO or whatever, in the unlikely event it has to be given back. I know, keep searching for the flying pigs ...

In any case, the great unwinding will separate the good from the bad and the ugly.

That's not rocket science, I reckon even Britney could understand. But, OTOH, anyone got the Barnacle's email address? I might give him the Clue.

[maggiemae656]

Now there's some logic, Novista. Why not start unraveling this mess at the source? The problem with Wall Street is their creepy, little "speculation" behavior based on headlines. So much money and effort spent trying to stave off their emotions?

Other than to create another layer of profit, why are these mortgages in the hands of investors, anyway? I don't thoroughly understand that part of it. Are banks not stable enough to handle mortgage financing on their own?

[joebaggadonuts]

Very nicely put. Thank you.

[QueenofSheba]

Privatization of profit, socialization of risk - Wall Street's way of pulling themselves by their own bootstraps. "Socialism" looks pretty good to them when they need public money.
And these clowns want to manage my social security account? BAH!!

[QueenofSheba]

Privatization of profit, socialization of risk - Wall Street's version of pulling themselves up by their bootstraps. "Socialism" looks pretty good to them when they need help.
And these clowns want to manage my social security account? Bah!!

[BlueChip]

Thank you. I keep wondering why everyone who preaches the free market forgets about it when it is their money on the line. It seems free markets only have a down side for poor and middle class folks. I would be much more comfortable with this deal if, as you suggest, the government had a way to get paid back if the bailout works.

[dadw5boys]

Warren Buffet warned this was going to happen in 2004 , 2005, 2006, and 2007. He is surprized it took this long.

Apparently some of the papers used as a insterment to trade shares have so many mistakes in them that they may never be able to clean up this mess. Deals made with scapes of paper and no figures on them. No oversight of the deal makers and traders to see if they are assuming too much risk.

[rixhex56]

"Wall Street recognizes when to switch off the free market rhetoric..."

It has always been like this in America. The wealthy have always advocated an "every-man-for-himself" FREE MARKET approach until they themselves needed public funding or some other public support such as legislation to protect their interests or even to increase their ownership. We've been seeing variations of this scam since our inception as a nation.

The wealthy have used the public's financing to screw the public for as long as there have been wealthier and poorer people. Of course, America was supposed to be a barrier against such exploitation, but that particular component of the experiment known as America has failed miserably.

Maybe every tax-payer should be awarded stock in these bailed out companies based on a proportion of the taxes he/she pays. Most of the world of high finance is alien to me, as it should be to all humans, and frankly, there seems to be something inherently wrong about bailing these scavengers and pillagers out every time they lie, cheat and steal their way into dire straits.

[eggman]

Hey, not fair! You lure us in by promising to talk about Britney and then it turns out to be all about stockholders and investors and other boring stuff. If this Wall Street place is so bad off, why can't they get Angelina or Madonna to adopt a baby from there? And this Stearns guy--if he needs a comeback he should go on "Dancing with the Stars".

[PackyJ]

Normally, I wouldn't care about specious analogies, but something in your post caught me as being particularly dumbass.
Regarding Ms. Spears "resisting help..."
How in God's name can you consider Dr. Phil to be "help?"

[1sanevoice]

that's why they cashed in spitzer when they did... he would have been the one who took on this theft

[dadw5boys]

i agree!!!!!!!!!