Stanley Kubrick directed the 1957 classic "Paths of Glory" starring Kirk Douglas and Adolphe Menjou. It is the story, patterned on actual events of 1917, of four sacrificial lambs executed after a failed French advance against the entrenched German army. The enraged French Generals picked four soldiers, tried them, and executed them for cowardice, figuring it would instill a new level of discipline in the rest of the troops. Rent it if you haven't seen it. Be prepared for one of the most emotional moments in any movie when the future Mrs. Kubrick sings "The Faithful Hussar" at he end of the movie to a rowdy group of battle hardened soldiers reducing them to a weepy-eyed bunch of boys who want nothing more than to go home.
Fast forward to 2008 and substitute Bear Stearns for the hapless French infantrymen and the plot line holds. I think the Fed needed a sacrificial lamb to throw on the altar of international finance to convince the investing world that, indeed, discipline will be instilled in the American system. Rather than just bail a struggling firm out, the Fed would set an example before opening the cash till to keep the system whole.
Maybe Bear deserved to fail, or maybe it was just bad luck to be in the cross-hairs at the wrong time. But I can see how stockholders and employees would be enraged. Larry Kudlow and I discussed on his show Monday night that Glass-Steagall, the law separating commercial from investment banks, was repealed almost 10 years ago, but the provision keeping the investment banks from using the Discount window wasn't repealed until Sunday night, after the deal for JPM to buy Bear for $2 was done. JPM gets to use the window, as do all other primary dealers, but only after Bear was executed.
I heard Carlos Gutierrez, U.S Secretary of Commerce and former CEO of Kellogg, and a man I admire greatly, on the radio and he was making a pitch to the world that the U.S. is a good place to invest. That's his job. But the world might need some convincing with the dollar sinking to new lows almost every day. If the international investing community thought the disaster that is the subprime battlefield would be bailed out by the Fed with no penalty, maybe there would be no hope for the dollar as all confidence would be gone. But if General Bernanke and Field Marshall Paulson stood a firm up against the wall, perhaps it would be the beginning of a return of confidence.
Bear, in the form of Jimmy Cayne, did itself no good as I wrote yesterday. When crunch time came, Bear had no friends. It also had maniacally pursued a monoline business strategy of collateralized bonds on top of collateralized bonds and was left without a chair when the music stopped. I don't think the "moral hazard" (bailing out reckless speculation) argument will hold any water.Bear was not only allowed to fail, it was pushed.
Could be I'm seeing conspiracies where there is only happenstance. It could be that commodities which took a dive on Monday will soar again. But it could be that the dollar might begin to firm as the world sees an attempt to put America's financial house in order. Ben could be a lot tougher than we took him for.
But enough. I'm going skiing while there is still some snow.
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Posted March 18, 2008 | 10:29 AM (EST)