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How is it socialism for the rich when one of America's leading financial institutions is completely wiped out?

by ctkrohn 19y ago

giardini 19y ago
For one thing because the Fed is buying the crappy mortgages and mortgage securities that brought Bear Stearns to it's knees. IOW the Fed is accepting those securities as "good" when they really aren't. Also, the Fed is extending federal insurance to BS somehow. Prior to Friday, BS had no such insurance, paid for no such insurance, did not follow the rules for such insurance but now, surprise, their customers get Federal insurance for free. So yes, it is indeed socialism for the rich: your dollar is being devalued to buy worthless mortgage securities so that a firm used by the wealthy can be saved from collapse. Bernanke's pulling moves out of his ass here: he should have let BS fail. Now every hedge fund will think the government will save it (which the government may try). Those are the same hedge funds that have been posting returns above 20% annually for years and that you need at least $200K to open an account. These funds didn't want to be monitored by the SEC while their value was going up. Now they've hit a snag and they're crying like babies for a Federal bailout paid for by your dollars. P.S. OMG! They just did it! Just off the Washington Post presses: ===================== "[The Fed] announced a new provision that will in effect do the same for major investment firms. Starting today, and lasting for at least six months, this new operation will allow "primary dealers," which are 20 major Wall Street firms, access to cash in exchange for assets in which the market is not currently functioning" ===================== So for six months the Fed is going to buy any and all illiquid (read "crappy") securities that these 20 Wall Street firms can't unload on their markets. Astonishing! Soon we'll have to swap dollars for toilet paper: they'll both be better suited for the other's purpose.
- caudicus 19y ago
  Do not be so quick to say 'illiquid' and 'crappy' are the same thing. Markets can act irrationally, both on the upside and the downside. Note that even when LTCM failed in 1998 (a MAJOR credit insolvency event - read 'When Genius Failed'), the Wall Street banks that bought out their balance sheet ended up either break even or yielding some profits once the markets went back to normal. "Ironically, after the bail-out by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the bailers." http://en.wikipedia.org/wiki/Long_term_capital_management http://en.wikipedia.org/wiki/Long_term_capital_management
  - giardini 19y ago
    Getting technical on my usage of the terms "illiquid" and "crappy"? In this case "illiquid" and "crappy" securities are the same: securities that are worth much less today than they were yesterday and that are projected to be worth even less tomorrow and for which the bottom has not yet been predicted. Those are certainly "crappy" since no one holding them wants to be holding them. They are certainly "illiquid" since no one _else_ wants to hold them. And your reference to the LTCM bailout are hardly reassuring. This is a great deal _only_ for J.P. Morgan. It's a very bad deal for U.S. citizens, most whom have no large holdings in J.P. Morgan. Essentially the taxpayer is taking on all of Bear Stearns' bad investments and J.P.Morgan is getting all the good parts of Bear Stearns at reduced price. But that's only the beginning. The Fed guarantee to back up these 20 Wall Street firms for the next six months will be disastrous. That gives them 6 months to dump all their garbage onto the Fed. What a deal. Hey, I've got a 1995 Buick that I can't sell and I'd like the Fed to buy it back for the $8000 I paid for it. I had no idea it wouldn't become a classic selling for twice what I paid for it. Justice! Give me justice!
    - caudicus 19y ago
      Yes, I am. They are not synonymous in this context. Don't take it personally. Projected to be less tomorrow? Says who? I would think that JP Morgan would not accept even a $2/share buy out if they thought it would be worth less tomorrow. They would only make such an offer if they thought it was a good deal to them with a potential upside. Thus they are willing to buy a "illiquid" asset and provide "liquidity" for "value" to themselves. It's how the world goes 'round. Illiquid and crappy may be the same thing now, yes, but investment is, by definition, making decisions for future profit. This is why, in terms of net present value, crappy and illiquid are not the same thing. JP Morgan is thinking "This is a great opportunity". In terms to my reference to LTCM as being hardly reassuring: get over it. We are in a credit crunch. We were in '98, we are now. It's bad, yes. This is probably worse than LTCM. I never said this was good, I said that 'illiquid' and 'crappy' are not by definition the same thing. That's all I said. I'm not even going to address your Buick analogy. Read this book - http://www.amazon.com/When-Genius-Failed-Long-Term-Management/dp/0375758259/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1205726864&sr=8-1 http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen... - it will give you a good idea how credit markets operate and how they can act irrationally. Right now the major issue is that no one knows how to value themselves because no one else knows how to value themselves because no one can value their portfolios. And in that uncertainty no one can judge who is right and wrong, who is getting a good deal and getting a bad deal. This is exactly why this situation is so screwed up. And this is exactly why the Fed is offering to provide liquidity for the rest of the market: because no one else is liquid enough to. Yes, it is a moral hazard, it sucks, but it is how it is. Look, this isn't a zero sum game. For all we know, inaction by the Fed could lead us down a more damaging path. There are smart people working there, with far more education and experience than both of us and then some. Let us not be so quick to judge.
hollerith 19y ago
From the Times article: The companies said that the Federal Reserve would provide special financing in connection with the transaction and that the Fed had agreed to fund up to $30 billion of Bear Stearns’s “less-liquid assets.”

How is it socialism for the rich when one of America's leading financial institutions is completely wiped out?

by ctkrohn 19y ago

How is it socialism for the rich when one of America's leading financial institutions is completely wiped out?

For one thing because the Fed is buying the crappy mortgages and mortgage securities that brought Bear Stearns to it's knees. IOW the Fed is accepting those securities as "good" when they really aren't. Also, the Fed is extending federal insurance to BS somehow. Prior to Friday, BS had no such insurance, paid for no such insurance, did not follow the rules for such insurance but now, surprise, their customers get Federal insurance for free. So yes, it is indeed socialism for the rich: your dollar is being devalued to buy worthless mortgage securities so that a firm used by the wealthy can be saved from collapse. Bernanke's pulling moves out of his ass here: he should have let BS fail. Now every hedge fund will think the government will save it (which the government may try). Those are the same hedge funds that have been posting returns above 20% annually for years and that you need at least $200K to open an account. These funds didn't want to be monitored by the SEC while their value was going up. Now they've hit a snag and they're crying like babies for a Federal bailout paid for by your dollars. P.S. OMG! They just did it! Just off the Washington Post presses: ===================== "[The Fed] announced a new provision that will in effect do the same for major investment firms. Starting today, and lasting for at least six months, this new operation will allow "primary dealers," which are 20 major Wall Street firms, access to cash in exchange for assets in which the market is not currently functioning" ===================== So for six months the Fed is going to buy any and all illiquid (read "crappy") securities that these 20 Wall Street firms can't unload on their markets. Astonishing! Soon we'll have to swap dollars for toilet paper: they'll both be better suited for the other's purpose.

caudicus 19y ago
Do not be so quick to say 'illiquid' and 'crappy' are the same thing. Markets can act irrationally, both on the upside and the downside. Note that even when LTCM failed in 1998 (a MAJOR credit insolvency event - read 'When Genius Failed'), the Wall Street banks that bought out their balance sheet ended up either break even or yielding some profits once the markets went back to normal. "Ironically, after the bail-out by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the bailers." http://en.wikipedia.org/wiki/Long_term_capital_management http://en.wikipedia.org/wiki/Long_term_capital_management
- giardini 19y ago
  Getting technical on my usage of the terms "illiquid" and "crappy"? In this case "illiquid" and "crappy" securities are the same: securities that are worth much less today than they were yesterday and that are projected to be worth even less tomorrow and for which the bottom has not yet been predicted. Those are certainly "crappy" since no one holding them wants to be holding them. They are certainly "illiquid" since no one _else_ wants to hold them. And your reference to the LTCM bailout are hardly reassuring. This is a great deal _only_ for J.P. Morgan. It's a very bad deal for U.S. citizens, most whom have no large holdings in J.P. Morgan. Essentially the taxpayer is taking on all of Bear Stearns' bad investments and J.P.Morgan is getting all the good parts of Bear Stearns at reduced price. But that's only the beginning. The Fed guarantee to back up these 20 Wall Street firms for the next six months will be disastrous. That gives them 6 months to dump all their garbage onto the Fed. What a deal. Hey, I've got a 1995 Buick that I can't sell and I'd like the Fed to buy it back for the $8000 I paid for it. I had no idea it wouldn't become a classic selling for twice what I paid for it. Justice! Give me justice!
  - caudicus 19y ago
    Yes, I am. They are not synonymous in this context. Don't take it personally. Projected to be less tomorrow? Says who? I would think that JP Morgan would not accept even a $2/share buy out if they thought it would be worth less tomorrow. They would only make such an offer if they thought it was a good deal to them with a potential upside. Thus they are willing to buy a "illiquid" asset and provide "liquidity" for "value" to themselves. It's how the world goes 'round. Illiquid and crappy may be the same thing now, yes, but investment is, by definition, making decisions for future profit. This is why, in terms of net present value, crappy and illiquid are not the same thing. JP Morgan is thinking "This is a great opportunity". In terms to my reference to LTCM as being hardly reassuring: get over it. We are in a credit crunch. We were in '98, we are now. It's bad, yes. This is probably worse than LTCM. I never said this was good, I said that 'illiquid' and 'crappy' are not by definition the same thing. That's all I said. I'm not even going to address your Buick analogy. Read this book - http://www.amazon.com/When-Genius-Failed-Long-Term-Management/dp/0375758259/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1205726864&sr=8-1 http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen... - it will give you a good idea how credit markets operate and how they can act irrationally. Right now the major issue is that no one knows how to value themselves because no one else knows how to value themselves because no one can value their portfolios. And in that uncertainty no one can judge who is right and wrong, who is getting a good deal and getting a bad deal. This is exactly why this situation is so screwed up. And this is exactly why the Fed is offering to provide liquidity for the rest of the market: because no one else is liquid enough to. Yes, it is a moral hazard, it sucks, but it is how it is. Look, this isn't a zero sum game. For all we know, inaction by the Fed could lead us down a more damaging path. There are smart people working there, with far more education and experience than both of us and then some. Let us not be so quick to judge.

hollerith 19y ago

From the Times article: The companies said that the Federal Reserve would provide special financing in connection with the transaction and that the Fed had agreed to fund up to $30 billion of Bear Stearns’s “less-liquid assets.”