Volcker questions Fed's Bear Stearns bailout

A bit off topic, but worth noting: Former Fed Chairman Paul Volcker (pictured) is raising questions about the Fed's rescue of Bear Stearns.

Volcker's chief questions: Why is the Fed rescuing a non-bank that it does not regulate? Isn't that a job for Congress? Why is the Fed guaranteeing bad loans? The Fed regulates --  and lends to -- banks, not investment houses.

Volcker calls the Bear bailout "... a new departure. And at some point, the government ought to — in my view, the government ought to be taking responsibility for that kind of action, not the Federal Reserve, which is an independent agency designed to provide an ample supply of liquidity to the economy but not too much, protect against inflation, not to protect particular sectors of the economy from bad loans.

In other words, rescuing companies other than banks, and guaranteeing bad loans, is a job for Congress and the White House. You want to bail out Carlyle Capital, or Chrysler or K-Mart? Go ahead, knock yourself out. Just don't ask the Fed to do it, because it's not their job.

Of course, potentially catastrophic failure was imminent and the Fed evidently felt it couldn't wait.  Volcker: "… They stepped into a vacuum, and I think quite appropriately, it’s a judgment they had to make. But is this what you want for the longstanding regulatory support system? My answer is no."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: Associated Press

Comments

[ray]

Volcker who cares??!!! I have to vote for the next American Idol.

Sheesh!

[Winfield J. Abbe]

The Federal Reserve, outside of any citizen control, is corruptly and fraudulently and illegally misusing printed United States Dollar Bills to manipulate the stock market, plain and simple. They are encouraging investments in risky common stocks along with the propaganda on stations like CNBC because they have reduced the interest rates on fixed rate certificates of deposit to virtually zero. In other words, some of the money to bail out the mortgage brokers who caused most of this depression is coming from the hides of the senior citizens who have acted responsibly their whole lives, paying for their homes, honoring contracts, but now receiving the shaft from this corrupt Federal Reserve and all the stock market gambling casino in New York. The New York stock exchange should be abolished and a new one honest one should be created in a different city. Why this is no more a free market than the former Soviet Union or any other Communist Country. And please stop that disgusting clapping and cheering at the opening and close of this fraudulent and corrupt institution, bailed out by our corrupt government without the consent of the taxpayers. Everyone should sell stocks; run them to zero. Treat these greedy so and so's as they have treated the responsible senior citizen of this country. Don't buy another stock period. In fact, let's put the new stock exchange in White Rock South Dakota and bring that dead town back to life.

[sunsetbeachguy]

Volcker endorsed Obama. That is good enough for me.

[Raul Garcia]

The continuing of the ponzi scheme that created this mess in the first place.

Leave it to Beaver.

[CD]

Winfield J. Abbe
Yes Sir, you are right.I watched wolker on Charlie Rose. Again Nouriel Roubini has a good take that follows on the same lines as Mr. Abbe. We have no business bailing out private investment firms that are not regulated by the US and involved in shadow banking. So we are bailing out whom exactly? Not the American Tax payers. No, we are bailing out the rich from their greed. That is why Paulson is there, to make sure his pals are taking care of, the rest of us will pay $10.00 for a loaf of bread.If we had let Bear Stearn go it will not have been the end of the world as we know it. I an any case which other shadow banking institution will it be next?Because this is not over, there will be more.....Those bastards play with our fears....

[TrojanDLA]

The Fed is in over its head. It is attempting to regulate and control things beyond its ability to direct. By overreaching, the Fed is going to create unintended consequences.

This is a slippery slope, and Volcker is right on the money; the Fed is now "all in", so what happens when 3 more investment banks start to show weakness?

[Michael Snyder]

It probably took a few days for Paul Volcker to calm down enough to call the Bear Sterns action as "a new departure" for the Fed. Talk about fodder for conspiracy theorist! The Fed's actions both in brokering and funding the deal calls to question the real motivation behind Paulson's actions. In a free market ( remember the "Kudlow Creed?) Bear Sterns should have been allowed to take it's lumps on the floor. I'm reasonably sure somebody would have stepped up to cash in on the fire sale and the day to day administrative functions of the company would have continued unabated.

In a marketplace racked by uncertainty the appearance of impropriety is at least as deadly as the fact and this deal looks as "chummy" as it gets. What's more, Paulson's defiant attitude makes it clear he's up for doing more of what's not working. ( insanity defined) As of this posting the DJIA has given back 75% of yesterday's gains. Some of the air is coming out of the commodities markets, but that's academic at the street level. What matters here is a fifty cent increase in the price of gasoline with the promise of more on the way. What matters here is not so much declining equities, but the ripple effect that has on the rest of the market. Let's face it, when Starbuck's is hurting, we're in real trouble. Folks have cause to be worried and most are playing it much closer to the vest than they have in the past.

It seems there is very little sense and no integrity left in our financial markets. It's small wonder all of the efforts at "rescue" have failed. Just like an open wound on a junkie won't heal for as long as they're doing dope, the markets won't be able to heal/correct until all of the over leveraged positions are uncovered and excised like a cancer. Integrity needs to return to the funds ratings process and insurers and ratings agencies need to step up to their commitments.

Putting a few dozen of these "robber barons" in prison would feel good, but it won't restore J Q Citizen's pension or provide him with adequate health care. Too many people are facing too much month at the end of their money for executives to be taking home bonus monies that exceed the sales value of the corporation they just trashed. It's about time somebody stepped up to question these bozos. I just wish Volcker hadn't minced words.

[anon1137]

The LTCM bailout was coordinated by the Fed and LTCM wasn't a bank either.

[anonymous]

Oh Michael,
As a J Q Citizen feeling this heat (not as bad as some, I admit) I think we should throw the robber barons in jail for a while. At least it would be something to make us feel good!

[CD]

The only way to protest , the only way to let ourselves be heard, the only way to make a difference is to take away the money they are playing with : OURS.
This is our future and the future of our kids. Maybe I have been watching too much " john Adams" on HBO
but it sure feel right and I wish we had leaders with courage and we have wimps.

[gary]

where are the cowardly senators and congress? Are they so afraid of bushco that they dont step up to the plate to help us???? I agree with other posters let BSC fall and quit holding them up. It is so damn obvious to everybody but of cowardly senate and congress. Who the hell runs this country? Wall street?? this is disgusting and we deserve to fall into 3rd world status.

[Maggie Knowles]

Michael Snyder - first of all, I love reading your comments, do you blog or write a regular column somewhere? If so, I'd love the link.

I would like to see these crooks, or "robber barons" go to jail for a long time not because it makes me feel better, but to deter others from engaging in the same behavior.

[Laker]

Maggie Knowles wrote: I would like to see these crooks, or "robber barons" go to jail for a long time not because it makes me feel better, but to deter others from engaging in the same behavior."

Maggie, That is the whole idea of a good justice system. It is to try and deter others from doing the same bad things. The problem is that the FED / congress / whole government is owned by Wall Street...

All these rate cuts, weekend buyout of bankrupt companies are pure Crack for Wall Street, we can see that on a daily basis. This is nothing for the homeowners / loan-owners and sure not future home buyers.

[puckhead]

Michael,

It’s naïve to think that if the FED did not engineered the shotgun wedding of Bear and JPM that Bear would have opened for business Monday and some white knight would have come to the rescue of Bear. Investments banks lifeblood is access to capital and by the end of last week, no one was willing to lend Bear money AND Bear’s customers were pulling their accounts and demanding money from Bear. It was a classic “run on the bank” situation and if the FED did not step in, Bear would have had to file Chap 11 on Monday. You say, “let Bear go bankrupt”. If it was only Bear, I agree 100%, let them go bankrupt. But the relationships I banks have with their creditors and customers are very complicated and interrelated. If Bear declared bankruptcy and default on their debt, the holder of Bear’s debt would have to write down the value of their asset (Bear’s debt) which would have lead this second bank’s creditors to demand that this bank put up more collateral on their debt or face paying the debt in full. You now have a situation where another bank could face a “run on the bank” situation and have to file chap 11, then another bank, then another bank, then some hedge funds etc. You get the idea of what this could have lead to. As morally reprehensible as it is for most on this board that the FED engineered this shotgun wedding, they had no choice to make good on Bear’s debt as the alternative was a meltdown of the world markets. The govt created this mess by loosely regulating I banks and allowing them leverage up to their eyeballs, now the govt (and taxpayers) will have to clean this up. What I do find apprehensible in the FED’s action is that AFTER the JPM takeunder of Bear, the FED announced with great fanfare that I banks would be allowed to borrow from the FED’s discount window. If the FED had allowed Bear this same access, the run on Bear would have ended and the company would have been saved. Instead, the FED sacrificed Bear’s shareholders and 14,000 employees to make Bear’s creditors whole. And before anyone lectures me about “who cares about millionaire bankers”, the vast majority of Bear employees are NOT millionaires. They work ungodly long hours under a lot of pressure, have families to support, mortgages to pay, colleges and retirement to save for and they face the prospect of looking for new jobs in a crappy job market for bankers. Bear employees could not even sell their stock as all this was going down last week because they were in a lockup period prior to earnings release. At the end of the day, the FED instead of giving Bear a lifeline via discount window instead tied an anchor around the employees neck and tossed them overboard. Nice going Ben.

[Ann]

First, for all who think this is a tempst in a teapot and you just want to keep obsessing on NINJA loans and how unfair it is and when will prices fall, well, you HAD better care about the extraordinary and unprecedented actions by the Fed. You may get more than yo wished for if the collpase of the value of mmortgage securities tears apart the financial system. (Last time it was this precarious was more than 6 decades ago so take a guess about when.)

Petet - the quotes you strung to together don't quite convey Volcker's comments which were basically

(1) What Berneke did was unrprecedented and rvery risky

(2) Not stepping into the Bear Sterns mess would have taken a lot of courage wsince given the market situation could easily have lead to a complete collapse

(3) While Bear was an emergency, it is NOT the job of the Fed to bail out any financial institutions

(4) Any rescuing should be done by the Federal Go'vt but only if needed to present a wholesale collapse of the financial system

(5) Wall St caused thhis whole debacle with its UNREGULATED financial "innovations."

(6) If investment banks want rescued or acces to the Fed Reserve, they MUST be regulated as banks are.

Volcker was really really emphasizing that Wall St did this to itself by thinking its self too clever by half and creating extremely complicated financial arrangements and doing it through unregulated business models.

He wasn't too kind about the wunderkind's mathematical models which claimed that the loan investments would only go bad every 100 years or wahtever. He basically called the mathematical models and risking modeling stupid. Pretty funny.

Here is the link to the actual interview - much better than WSJ's recapped summary.

http://www.charlierose.com/home

Peter - this IS not off topic. It is the collapse in value of the mortgage securities that is causing the collapse in the financial markets. The mortgage securities values are in free fall because of the defaults - which are now hitting the Triple A rated Alt-A loans hard (like 15% default rates in a pool.)

It is VERY much on topic. My degrees in economics and in the economic history of the Great Depression have suddenly made me real popular with my bankers and at a regional conference on housing, land use and planning last week. This is all very relevant to house prices since it involves the lending side - just like the move by OFHEO yesterday. (I will admit that while on topic, it is a little arcane for the average reader.)

Soryy about any typos - long day and this blasted print is so small.....

[tim]

to puckead..........if the gods of free market wish to walk the walk, then let BSC go under. Nobody minded when thousands of auto workers and aerospace workers lost jobs. BSC is full of people if they were not selling crap at BSC they would be selling life insurance.

[Michael Snyder]

puckhead
I'm not assuming a white night & at least one major investor in Bear Sterns isn't buying off on the Fed's deal. So we'll see if this "no load" offer of JP Morgan's even manages to close. It's a travesty from start to finish that reads like either a no money down home in Palmdale or a scene from the "Godfather" with the principals playing in a bridge tournament while the deals' being made. I guess any alibi is a good alibi.
I understand the "domino theory" you've invoked, but as you said, had Bear Sterns been given the same opportunity as their peers that scenario would have been nipped in the bud.

Bottom line is this is a crisis of confidence and Paulson's heavy handed actions just increase the perception of corruption and incompetence within the government & the Fed. And you're right, rank & file employees are once again the ones left holding the bag. I wouldn't want to be looking forward to retirement from Bear Sterns anytime soon, but Mr. Spector will keep his $382 million dollar bonus.

[SJ]

Did I read this right?

" in my view, the government ought to be taking responsibility for that kind of action"

How about Bear Stearns taking responsibiity for their actions? Where are all of the "take responsibility for your own action" republicans on this one?

Bear Stearns chose to bet on mortgages and LOST. The deserve to lose the money they recklessly gambled on sub prime loans.

How are these banks supposed to learn any fiscal responsibility if the government continues to bail them out?

At the very least, Bear could have checked the loans they either bought or made to deadbeats with horrible credit who they knew were not likely going to pay them back.

[Kaye Thomas]

Dear Puckhead,
Well said.. The problem however is if the FED lets Bear borrow from the "bank window" then they have to open the window to everyone and that's not their function.

The FED should not be available as the lender of choice to every company in dire straits. Congress needs to take a very serious look at what happened and figure out how to deal with the problem rather then grandstanding based on the political party where they hold membership.

It's is time and past time to once again start regulating banks and Wall street. Bush and his boys may not like it but they will like a major disruption of the economy a whole lot less.

[Michael Snyder]

Maggie Knowles
Thank you for your kind words. Real estate and the forces that drive the market provide a fascinating application for the laws of physics and Sun Tzu in real time. Word smithing is but a pastime and I enjoy the interchange in this venue.

[LA-renter]

puckhead,

Let me say, I was charmed and reassured by your reasoned explanation... until you got to the lil' Bears and wee Stearns, who "work ungodly long hours under a lot of pressure, have families to support..."

Hey, that sounds familiar. Oh, yeah. I work long days, --even most weekends-- have lots of pressure and have a family to take care of too... and --no complaining-- I make much much less for my effort.

Bear Stearns was not a victim. Bear Stearns was at the center of the mortgage security mess. Bear Stearns did this to itself. Period.

As for your scenario, why couldn't the Federal Reserve just intervene when the dominos began to hit their normal beat, the traditional banks?

[Raul]

It looks like both streets are having a hard time right now. On main street a lot of people invested in Real State, on the belief that they were going to make a lot of profits in the future...Not only people that bought their first home, some were buying rentals, we had "school of biseness" like Donald Trump telling every one to refinance their houses and buy more properties..... They are in a very uncertain position, not knowing if they will be able to keep their properties or not. On top of that we have a recesion.... Renters and home owners are loosing their jobs or they are not working as many hours as they used to.. It means pressure on rents, oil, food, cloth, comodities to go down. Less money is circulating, profits are coming down. Some people owes more than what they have.... Including some Banks and Financial Institutions, there is no margin for error... we have two options: 1) The buble get deflated and a lot of people will go down (investors, Banks, recent home owners) except the top guys, they always find a way to make money.... 2) the buble does not get deflated... Some one mention Japan. The next President will bring the Troops back, that means more people competing for less jobs. Bush said in the long run we will be ok. He is right , He did not define "long run"

[buz]

The Fed can save the economy but in so doing will end up trashing the economy. It's a Catch -22. Perfect.

[bottom line]

Hey Michael, thanks for taking it in good fun when I called you out on that "wrap your mistake around $1,498,500,000,000" post. Like I said then, big #'s , whoa, we're getting used to them! Read your post above , & agree, with a MAJOR exception, LOL. You said_Let's face it, when Starbuck's is hurting, we're in real trouble._Well, I would posit that when people made Starbucks a 'brand', Americans lost all common sense. All the sharp & savvy bloggers here, I got a ? for you. When you can brew a cup of premium coffee @ home for, what, 15 cents MAX, who are you trying to impress at the YokelShop? Michael, 'when Starbucks started doing gangbusters, the end was near!'

To puckhead, read your comment above, but when you said _But the relationships I banks have with their creditors and customers are very complicated and interrelated._ sorry, I gotta laugh. Oh, yeah, hit us rubes with the "Andy Fastow bluster", LOL. BSC makes garbage so complicated none of us 'common university educated nonces' can even begin to comprehend the depths of WONDER & complexcity!! We are held in 'AWE' of the magnificent RAPTORS, & other off-book companies. lol. Got news for you puckhead, Volcker was 10X smarter than that stooge Greenspan, who thought talking greenspeak was a substitute for intelligent management. I'll stick with my Dad's philosiphy, 'Treat a shoe clerk like a banker, & a banker like a shoe clerk.' Shoe clerks don't deal in much BS, & you might not be one of "The Smartest Guys in the Room." Study a little Enron.

[Michael Snyder]

bottom line
My point with Starbuck's is it's one of the first things most folks will cut out when their budget's hurting. The Starbuck's concept & execution was excellent until they decided to saturate their market. Around 2000 I did a stint in the coffee biz & it's a license to print money. The single most expensive item in most coffee drinks is the container. But the zeros are easy to keep track of...