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Rescue Me: A Fed Bailout Crosses a Line
Key Excerpts from Article on Website of New York Times
Posted: March 19th, 2008
http://www.nytimes.com/2008/03/16/business/16gret.html?ex=13...
What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year? Or all of the above? Stick around, because well soon find out. And its not going to be pretty. Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Feds Rescues R Us doctrine that already helped to force the marriage of Bank of America and Countrywide. But why save Bear Stearns? Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, were brass knuckles, were tough? asked William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of Greenspans Bubbles: The Age of Ignorance at the Federal Reserve. After years of never allowing any of our financial institutions to fail, they have become so enormous that nobody will be allowed to sink beneath the waves. Otherwise, a tsunami would swamp the hedge funds, banks and other brokerage firms that remain afloat. If Bear Stearns failed, for example, it would result in a wholesale dumping of mortgage securities and other assets onto a market that is frozen and where buyers are in hiding. This fire sale would force surviving institutions carrying the same types of securities on their books to mark down their positions, generating more margin calls and creating more failures.
Note: This excellent article should be read in its entirety by anyone who wants to understand the impending financial meltdown and the government's response to it.
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