Taxpayers Bail Out Bear Stearns; JP Morgan Buys for $2/Share Discount

Posted by Richard Blair, The All Spin Zone at 5:19 AM on March 17, 2008.

A couple of months back, I wrote the following:

The unprecedented wealth transfer from poor and middle income families to the uber rich is nearly complete. The folks at the bottom of the GOP-led financial pyramid scheme are nearly bled dry, and the pyramid is about to collapse. To sustain itself a little longer, the folks at the top of the pyramid will have to start an Amway-style ritual of financial cannibalism amongst themselves. I think that (to an extent) this is exactly what we're seeing in the stock markets and big financial houses as the true meltdown begins...

On Friday, it was announced that JP Morgan Chase Bank was acting as an intermediary to bail out the financial investment bank Bear Stearns, and essentially funneled billions of dollars from the U.S. Federal Reserve (read: you and me) to those who had entrusted their investment fortunes to Bear Sterns.

I don't even know where to start on this one. How about here?

So the only possible justification for such Fed action is to engineer an orderly rather than a disorderly shutdown of this institution. But unfortunately the Fed is behaving as if Bear Stearns is illiquid but solvent. That is delusional and the official sector support of an otherwise insolvent institution will end up - like many other recent Fed actions - being paid for by the US tax-payer...

On Friday, Bear Stearns stock closed at $30 / share, down nearly 50% from the prior day.

Today, J.P. Morgan Chase agreed to buy Bear Stearns for $2 / share. You read that right.

$2 / share.

But almost as importantly (riffing on the link above), it was also announced that the Federal Reserve will now extend their "lender of last resort" protection not just to banks, but to investment houses. So, the next time a Bear Sterns (or Merrill Lynch) gets into trouble because of bad investments, the U.S. Federal Reserve will bail them out. Or more correctly, their well-heeled institutional investors.

I freely admit I know very little about the inner workings of the banking and investment industries. But even a financial neophyte like me can understand that the Fed appears to be engaging in a totally knee jerk reaction to a liquidity crisis of a single, poorly risk-managed company.

This is getting really scary. I can't imagine that the markets will react well to this when they open on Monday.

Richard Blair is the blogmaster of All Spin Zone.