The Bear Stearns deal: Buying a "house on fire"

Today's Senate hearing on the Fed-backed rescue of Bear Stearns provided a few interesting insights and quotes. Both the New York Times and the Wall Street Journal have new information on how the deal came about.

Call it a bailout: " 'If you want to say we bailed out the market in general, I guess that's true,' Fed Chairman Ben Bernanke testified. 'But we felt that was necessary in the interest of the American economy.' "

A House on Fire: " 'Buying a house is not the same as buying a house on fire,' JPMorgan Chase CEO James Dimon (pictured) said, explaining his low-ball offer for Bear Stearns."

Hammerin' Hank: If Bear Stearns shareholders who were nearly wiped out choose to blame a single person for the rock-bottom price, after today they will blame Treasury Secretary Henry M. Paulson Jr. The New York Times: "Treasury Undersecretary Robert Steel said that his boss, Mr. Paulson, had said during the negotiations that the price should be low because the deal was being supported by a $30 billion taxpayer loan."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AP

Comments

[firesale]

94 to 1 Senate vote for a Bailout.
I guess that solves it.

BUNNING FOR PRESIDENT !

[Giacomo]

It was fun watching Undersecretary Steel trying NOT to say, that yes, in fact, the Treasury Dept. DID manipulate the purchase price. Can you blame them? If you were putting up money to buy something that might be worthless, you'd want the price to be as low as possible, right? LOL

[Winfield J. Abbe]

Isn't it funny how even school children are taught (indoctrinated) with the lie that America's economy is based on the "free enterprise system"? Oh, it is? Well what school did the Federal Reserve Bank Chairman attend and what school did the Treasury Secretary attend? Because evidently they were taught somewhere in the Soviet Union or Cuba or South America... It is pure speculation on the part of Mr. B. what would have happened if he had not authorized the printing of U.S. dollars to bail out Bear Stearns; pure speculation. The only way to really find out what would have happened was prevented by him and his cronies who evidently lay awake nights seeking ways to corrupt the "free enterprise system" some have fought so hard to maintain. These people can't stand the thought that their friends and cronies in the NewYork gambling casino might actually lose half or more of their inflated investments, inflated by a bunch of hot air propaganda every day on television, radio and the media.
Let the chips fall where they may. This would be free enterprise. As a U.S. citizen and taxpayer in good standing for 69+ years, I demand they recind the fraudulent Bear Stearns transaction and let us all observe the consequences. If it be flushed down the financial toilet, so be it. And let all those other wind bags be taken down to the sewer of the earth along with it. Mr. B. and his cronies have no, zero authority for the fraudulent actions they took for Bear Stearns. Again, his claims of what "would have occurred" are pure speculation without any proof whatsoever. Let the market find its own level. That is what "free enterprise" is all about. That is why GM and Ford are almost bankrupt and no one is bailing them out or seeking to inflate their market value as Mr. B. is evidently seeking to fraudulently do with the New York gambling casino.

[AJ]

To: Winfield J. Abbe who said:
"That is why GM and Ford are almost bankrupt and no one is bailing them out or seeking to inflate their market value as Mr. B. is evidently seeking to fraudulently do with the New York gambling casino"
Bingo! You hit the nail on the head. This is a gambling casino environment. Thanks for the great post!

[gary]

To Mr Abbe

NEW BOOK OUT A MUST READ

"where have all the leaders gone" by lee iaccoca

I cannot say enough good things and he isnt a fan of bush or congress or the senate.

VOTE NO INCUMBANTS and lets take back america

[Michael Snyder]

Right on Winfield!
The reason GM, Ford, Chrysler & what few manufacturing companies we have left are not on the list for bailouts can be explained in one word; leverage. This was not about preventing a "run on the bank", this was about keeping the number one dirty little secret in the financial world. All of these "investment banks/brokers" have been trading hot air for years. Funds leveraged into double digits are no funds at all. When investors got burned by the collapse on the Carlyle Fund that was leveraged to 32:1 and the parent company, Carlyle Group simply folded the corporation the jig was up. Investor's now know their funds are not secured by anything that resembles integrity or honor, their only security is in the investor's ability to "collect". With the legal web of multiple corporations that actually manage these funds, it's impossible to hold any individual responsible for the "corporation's actions". Bottom line is had Bear Sterns been allowed to go under, the entire subprime Ponzi scheme would have imploded the following week. So instead of allowing the market to uncover it's own shaky foundation, Paulson f*#ked the retirement funds and rank and file employees of BS to settle an old grudge and instituted with the largest money laundering scheme in history the next day to bail out the rest of the financial sector. Now Bear's competitors can launder their subprime paper through the Treasury while any Bear Stern's employee over 55 is now contemplating a diet of pet food after retirement. The top management who got Bear into this mess will keep their $100 million + golden parachutes though.
How nice!

[alvin]

Winfield and AJ,
I think it's a little more complicated than you make it out to be. i also think most of the public resentment over this transaction is based off misconceptions rather than reality. Even calling it a bailout is a bit of misnomer. No tax dollars have yet been spent, and they may never be. Have you asked any Bear employees or shareholders how "happy" they are about this so called "bailout"? Downright depressed seems more like it.

But to your points, how was the transaction "fraudulent"? Do you mean in a criminal sense? You make the claim throughout your post, but you don't give any reason as to why or how.

You also seem to imply that it's all just a ruse to help out their wall street buddies. Did you guys miss the part about 14k Bear employees now looking for a new job? Or the "owners" of Bear losing 95% of their investment? Check out the stocks of Lehman and Merrill and other financial firms, and explain how "friends and cronies in the New York gambling casino" haven't already lost more than half their investment too.

Also, can you clarify where or how they are "printing U.S. dollars to bail out Bear Stearns"? I didn't catch that in any of the articles, or in any of the testimony yesterday.

BTW, I think our economy is absolutely "still" based on the "free enterprise system". It may not be 100% free and unregulated - it never has been and never will be - that is next to impossible in any governed society. And no school I went to ever claimed anything to the contrary. But it does form the foundation of our economic system. And to suggest that bernanke and paulson and crew stay awake at night figuring out ways to "corrupt" the system rings to me of conspiracy theory. i think their intentions are to help, not hurt the economy. many will argue about the effectiveness their actions towards achieving that goal, but i hope most don't question the underlying motive...

[CD]

Winfield J Abbe, Sir
Can't you go to congress and talk to those guys, I'll pay the plane ticket and lodging. Wouldn't it be great to have a televised town meeting where for once the voice of the people would be heard. Would the LA Times want to be on the forefront of a revolution?

[jb]

Firesale,
I agree with you. I sent Bunning an email yesterday telling him how impressed I was with him standing up and going the right thing. I also told him how I am a lifelong democrat who is fed up and willing to change teams over this.
j

[JohnnyB]

“But he (Mr. Schwartz) said he realized that he had misunderstood the terms of the loan...”

That frames him like he’s just one of the “greater fools” who couldn’t understand that an adjustable rate mortgage from Countrywank might actually adjust. How disingenuous.

“Only a few days earlier, the chairman of the S.E.C., Christopher Cox, had sought to calm investors, telling reporters that ‘we have a good deal of comfort about the capital cushions’...”

Those would be the lead soaked whoopee cushions from China.

“We had no interest or no concern about the stock price that was evaluated,” Mr. Bernanke testified.

Really?... So, which is it… no interest “or” no concern. Nice parsing Mr. B.

“They said that under the terms of the deal, an investment manager retained by the Federal Reserve Bank would have 10 years to dispose of the assets.”

Nice deal… the crooked carni shell game in action right before our very eyes.

“All the leverage went out the window…” (Mr. Schwartz) said.

When a company over-leverages to the extreme and the absurd, it should go out the window.

Luckily for the billionaires club, it’ll come back around through the new “discount” window in the form of our tax dollars. That’s the roulette wheel in action. They bet and lost all their flawed SIV/CDO chips on 23 red, but the Fed (croupier) illegally slid a stack of chips on “outside red” for them. Oh look, you (personally) didn’t lose after all.

Then the Fed frames it as… we had to cheat for them because otherwise all the other “counterparties” might be adversely affected. Counterparties… what a crock of indefinable crap. Just say rich buddies, pals and chums… come on.

Since none of the gamblers want to come clean on what chips their holding, they should be hung upside down (by law) so that those chips fall onto the floor. Those with no chips left, please leave the casino and don’t ever come back. You’ve done enough damage.

[Jeremy S.]

A lot of anger here from the regular citizen, once again, with our institutions. But when, how and who will harness all this middle class anger at all this bumbling, lying, institutional criminalty/deceit and turn it into a powerful, politically effective party? A New Deal if you will. No need to raise your hand, just step right up and lead, we will follow. Otherwise, please move to the other side of the street because I'm already pissing in the breeze on this side.

[Bots]

Where's Monty Brewster when you need him?
http://youtube.com/watch?v=3LPdTXRjIKQ

[sfvrealestate]

'Buying a house is not the same as buying a house on fire,' JPMorgan Chase CEO James Dimon (pictured) said, explaining his low-ball offer for Bear Stearns."
Wow! I'm going to use this expression on listing agents the next time one of my buyers writes a really low offer! Thanks for the ammo, Mr. Dimon!

[Cal]

Bear stearns got destroyed and was given a token just because the Fed wanted the deal to happen immediately instead of go through bankruptcy court.

The people who got the sweetheart deal were JP Morgan, they were the only bidder and new the other side was under the pressure, so they bid low and made the gov't guarantee the risky part of the portfolio.

[Lou]

How can we beilieve these people when they say that letting Bear Stearns fail would've damaged the economy when they turned a blind eye to what was really destroying the economy all these years?

[MyLessThanPrimeBeef]

This just in: The Clintons report gross income of $109 million since 2000.

Fortunately for us, they show no sign of slowing down, hard working Americans they are, and will no doubt inspire others, like so many candidates last year and this year, to the presidency and (unvoted) co-presidency.

And if we behave, they might just use some of that money or money to be earned in the future to start a foundation to show us how to be virtuous; or they can be wise, like lefty, and buy Metro LA now!

Alvin, the way the Fed creates money 'out of thin air' is through open market operations, i.e. the NY Fed purchasing Tressury bonds. So, when the Fed 'bought' $30 billion worth of junk stuff from Bear as part of the deal with JP Morgan, that's creating money, i.e. printing money, albeit electronically.

[LeavinLA]

Hey, Lou Hyperbole and your hyperventilating pals: The economy is not "destroyed." It's in a down cycle, like it has been time and time again over the decades. It always comes back, and those of who understand that will be in a position to make nice bucks on the upswing, while you sit crying on the sidelines.

[Henderson]

Actually this was the best thing that government and JPM could do at the time as I believe, when comparing the catastrophe happened allowing Lehman to fail.