Sunday, March 16, 2008

Bear Stearns Bailout Addendum

Since the preceding post was published, the purchase of Bear Stearns by J.P. Morgan Chase for $2 per share was announced. In the 52 weeks that preceded the collapse of Bear Stearns late last week, its stock sold for at a high of $170 per share and a low of $26.85 a share. The $2 a share sale seems bogus and reminds one of the days that the savings and loan institutions were being sold in shot gun transactions forced and overseen by the government. The buyer would take the ailing institution for some nominal price and the government would give the buyer some multiple of that price in a combination of (i) cash, (ii) guarantees of the acquired institution's bad and questionable loans (and also pay the buyer for administering those loans), and (iii) waivers of certain regulatory requirements and restrictions. Can't help but wonder whether/when we're going to find out what J.P. Morgan Chase is getting for taking this sick puppy and its mess off the street and out of sight.

Anyone who thinks the government hasn't been complicit in creating this mess should recall that ever since the Carter administration the government and its financial regulators have pressured financial institutions to adopt community lending and similar programs. These programs have called for lenders to make loans to poor people and others whose credit worthiness normally would have precluded them from purchasing homes. The idea was to loan the full purchase price and even more to enable these people to buy houses, and it was based on the concept that housing prices would rise to give these people some equity in the collateral property and that this would enable them to refinance their loans before the artificially low initial rate reset. Another bonkers government Ponzi scheme gone the way they inevitably do.

Just wait till such other off-the-books Ponzi debacles in waiting as Social Security, Medicare, and the prescription drug and pension guarantee programs bite the dust the same way.

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