Black Box Report

Because some days you get the bear, and some days the bear gets you:

In a shocking deal reached on Sunday to save Bear Stearns, JPMorgan Chase agreed to pay a mere $2 a share to buy all of Bear — less than one-tenth the firm’s market price on Friday.

As part of the watershed deal, JPMorgan and the Federal Reserve will guarantee the huge trading obligations of the troubled firm, which was driven to the brink of bankruptcy by what amounted to a run on the bank.

$2 a share. $236 million. Bear Stearn's building in Manhattan costs more than that. Heck, A-Rod's contract with the Yankees cost more than that. Kevin Drum smells fraud:

For now, I won't argue with the Fed arranging this bailout. Maybe it had to happen, and maybe it will prevent some kind of larger systemic collapse. At the moment, that's more important than assigning blame. But I would like to know why, on Friday, investors thought Bear's financial assets were worth $3 billion, when, in fact, they were worth something closer to -$3 billion — something that the principals at Bear surely must have known for quite some time. If there's no fraud involved in that, then the word has pretty much lost all meaning.

Because Bear's assets were so worthless, the FED had to guarantee JP Morgan a $30 billion line of credit to make the deal go through. That's not an "orderly winding-up of business," it's not even a deal-sweetener; it's a bribe. That's your money, and mine, bailing out the Wizards of Wall Street:

If Bear Stearns screwed up big time - as it did - with huge leverage, reckless investments, lousy risk management and massive underestimation of liquidity risk why should the US taxpayer bail out this firm and its shareholders? First fully wipe out those shareholders, then fire all the senior management and have the government take over such a bankrupt institution before a penny of public money is wasted in bailing it out. Instead now the use of public money to bail out financial institutions is spreading from banking ones to non banking ones. The Fed should at least give a clear and public explanation of why such extremely exceptional - and almost never used - intervention was justified.

Unless public money is used on a very temporary basis to achieve an orderly wind-down or merger of Bear Stearns this is another case where profits are privatized and losses are socialized. By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role.

I anxiously await the free-market conservatives and libertarians to decry the government taking a heavy hand in interfering with the natural fluctuations of the market. The free market cures all!

[crickets]

No? Maybe it has something to do with the fact that, while watching Larry Kudlow's head explode would've been entertaining to watch, somebody had to do something, or else the whole Jenga tower comes crashing down. Or maybe all the arguments for a laissez-faire , hands-off approach, where "regulation" is a four-letter word, are just slightly dishonest. And isn't it time for some honesty from everyone involved, including the Fed?

Just last year Chairman Bernanke was telling us that the problems in the subprime market were likely to be contained. It is time that the Fed comes clean with both an honest assessment of the severity of the problem and increased transparency in its behind the scenes deals with the big banks.

There is something a bit obscene about billions of taxpayer dollars going to the country's richest people, when average workers can't afford health care for their kids.

Increases in food stamp benefits and extending unemployment insurance? Sorry. No safety net for you. But corporate welfare? No problem:

When people make the choice to buy groceries instead of health insurance and then develop cancer, the right shrugs, and says it was their fault...When an investment company chooses to put its money into unwise investments, triggering the firm's collapse...the right sends the Fed screaming to the rescue with $30 billion....

Conservatives profess to hate the safety net, but they're lying. They love the safety net -- when it applies to the rich. The rich, you see, deserve to be supported, deserve to be coddled, deserve to get handouts. Why, the Chairman of Bear Stearns might have had to miss last week's bridge tournament if he didn't know that the Fed would come to the rescue with taxpayer dollars.

A few years ago I was in a bar debate over the skyrocketing salaries of CEO's; particularly, but not exclusively, those of the Wall Street Ma$ter$ of the Univer$e. "They're worth it," I was told. "They Do the Hard Work and make a lot of money for their shareholders." "But what happens if they don't?" I replied, "They still get their golden parachute and everyone else gets left holding the bag. Where's the incentive?" Case in pont: Instead of keeping his company from tanking, Bear Stearns Chairman and welfare king Jimmy Cayne spent his tenure playing cards and golf, and netted $232 million in compensation for his (lack of) troubles. His employees? Not as fortunate:

There will be at least 10,000 firings since JP Morgan bought Bear Sterns for pennies on the dollar. That's the size of a small town. Ten thousand people who, like the Enron employees, held portfolios that were loaded with shares of the company where they worked. Ten thousand people, most of whom just wanted to show up to work, draw a paycheck, make ends meet, and enjoy their families and lives.

Yes, but they're the little people. Compared to the Welfare Kings of Wall Street, they don't count.