Article: Economic Meltdown and Crony Capitalism

President Bush claims that the Federal Reserve and his Administration have moved quickly and aggressively to address the mortgage and economic problems. I guess that it depends on what one counts as quick and aggressive. Back in September 2006, the Mark Trumbull of Christina Science Monitor wrote Risky mortgages threaten a squeeze. The news for the next eighteen months to the present have been a long ringing of alarm bells. However, housing was an issue even before 2007. On October 3, 2006 Scott and Archibold wrote (emphasis mine):

The burden of housing costs in nearly every part of the country grew sharply from 2000 to 2005, according to new Census Bureau data being made public today. The numbers vividly illustrate the impact, often distributed unevenly, of the crushing combination of escalating real estate prices and largely stagnant incomes.

The response of the Fed and the Administration to the looming mortgage crisis? Nada - except to raise interest rates which exacerbated the problem. Which brings us to the current "swift" action in the form of the "bailout" of Bear Sterns. Bear Sterns is an eighty-five year old firm and the fifth largest U.S. bank. Actually, Bear Sterns is not a "bank" per se. It is an "investment bank', which means that it deals in equities and securities to provide monies for governments and companies. So, the Federal Reserve makes $30 billion (with a B) available to back the investments of Bear Stearns. They make that money available through JP Morgan Chase (and Bank One), which is a competitor of Bear Stearns. Just on the face of it, such a move raises a ton of questions. Why is the Fed assuring the funds of the private investment industry? Why do it through JP Morgan rather than Bear Stearns directly? Whose money is the Fed lending, and exactly what happens if the backing of those investments fail? Some of these issues are answered in a March 17, 2008 Business Week article "article. In trying to address why the Federal Reserve would back JP Morgan in acquiring Bear Sterns, the authors state:

To protect JPMorgan from the greatest risks on Bear Stearns' books, the Federal Reserve agreed to guarantee up to $30 billion of Bear's most troubled assets -- primarily mortgage securities that have plummeted in value and have become tough to sell.

They go on to note that tax payers could be on the hook for the money, but that the Fed also has its own reserves from the sale of Treasury Bills and securities. The Fed has indicated it would back up to $200 billion to avert the mortgage meltdown. As to why JP Morgan rather than someone else. I think we need look no further than the lobbying money that has been spent. See Bear Stearns and JP Morgan lobbying tallies below (courtesy of OpenSecrets.org). Bear Sterns lobbying efforts from OpenSecrets.org:

From OpenSecrets.org

It should be noted at JP Morgans' lobbying effort in 2007 totaled $5,440,000; however, the entire commercial banking sector only contributed $5,485,000. That speaks volumes. Interestingly, the question of why Bear Stearns ran into trouble was a "run on the bank." The Business Week article states:"Jittery clients sought to take their money out of Bear Stearns, but Bear said Friday it did not have enough money on hand to meet all payments. When word of that got out, more clients demanded their money." What it does not state is that those "clients" are governments and corporations - not you and me. I might add that T Bills are considered among the "safest" of investments. T Bill holders might be a bit jittery about their "safe investment" being thrown into a mortgage meltdown reportedly linked to predatory lending practices and massive foreclosures. Well, the "bailout" of Bear Stearns became and (government subsidized) acquisition facilitator for JP Morgan. THe Fed put up $30 billion and JP Morgan bought Bear Stearns for $263.2 million (BusinessWeek). Bear Stearns had an estimated value of $8 billion with investments much higher than that. SO let me get this straight. We have Bear Sterns which has hard assets of over $8 billion, and investment holdings in the multi-billions, which has the Fed prop up its "riskier" investments to the tune of $30 billion through a competing investment firm which scoops of Bear Sterns at a fire sale price of $236.2 million. Hmm. Further, I heard that Bear Sterns office buildings alone (hard real estate) was worth roughly $1 billion - fire sale indeed." Why does this not add up at all? Who did lose in this little shell game of "I Hit the Jackpot?" Well for one, the share holders (including those unlucky enough to have their retirement plans invested for them in Bear Stearns." They lost over 95% of their funds overnight (BusinessWeek). Not mentioned at all are those who are losing their homes through the machinations of the investment firms. Then of course, there are the U.S. tax payers who now stand on the line to save JP Morgan's assets. Ah isn't crony capitalism grand? Relevant Articles 3/14/08, MSNBC. JPMorgan, Fed come to rescue of Bear Stearns. 3/14/08 BBC, Bear Stearns gets emergency funds. 3/14/08 Thomas, International Herald Tribune. Bear Stearns gets a lifeline from Fed and a rival. 3/15/08 Irwin & Tse, Washington Post. Fed Comes To Rescue As Wall St. Giant Slips 3/15/08 Thomas, NY TImes. Run on Big Wall St. Bank Spurs Rescue Backed by U.S. 3/15/08 Giannone & Hanilton, Reuters. Fed comes to Bear Stearns' rescue 3/17/08 Goldstein, MarketWatch. U.S. stock futures slump on Bear Stearns, Fed action 3/17/08 Zibel & Herron, BusinessWeek. Why Fed helped JPMorgan buy Bear Stearns.