Contact Craig R. Smith

2008-04-04

"Yes, we bailed out the economy," said Fed Chairman Ben Bernanke in Senate testimony on Thursday, referring to the Fed's role in responding to the Bear Sterns collapse. But since when is it the Fed’s job to authorize spending taxpayer money, which violates the long-standing separation between Fed and Treasury duties?

Testimony presented to the Senate Banking Committee by the players in the Bear Stearns/JP Morgan bailout exposed, moment by moment, just how vulnerable our financial system is to collapse.

I sat spellbound watching Bernanke use terms like “severe” and “extremely difficult to contain” when referring to the damage that would have resulted in the collapse of Bear Stearns, the fifth largest investment bank in America.

“Given the exceptional pressures on the global economy and financial system, the damage caused by a default of Bear Stearns could have been severe and extremely difficult to contain,” said Bernanke.

Those words should send chills down every spine in America.

I might understand such damage occurring if one of our major commercial banks failed. But an investment bank?

“The fate of Bear Stearns was the result of a lack of confidence, not a lack of capital,” continued Christopher Cox, chairman of the SEC, making it abundantly clear the real problem was the lack of confidence in Bear Stearns.

Alan Schwartz, Bear Stearns CEO, echoed the Cox comments by adding that what brought Bear Stearns to its knees was not a lack of capital or liquidity but a lack of confidence. Schwartz added “unfounded” rumors caused that loss of confidence.

Jamie Dimon, CEO of JP Morgan, asserted, “A Bear Stearns bankruptcy could well have touched off a chain reaction at other major financial institutions, that would have shaken confidence in the credit markets that already have been battered”.

Dimon, while not explaining the degree to which the institutions are connected through the $135 trillion credit and interest derivative market, knows full well the domino effect a Bear Stearns collapse would have triggered.

Is our system truly this vulnerable? Can a handful of rumors cause a collapse? Can the loss of confidence send a cascade of destruction through the economy taking down everything in its path? Can an avalanche of debt wipe out good, honest, hardworking people and their investments?

Apparently!

This dynamic group of financial market saviors went into battle mode on the weekend of March 15th and birthed a taxpayer-sponsored bailout to keep the financial markets from imploding.

With the stroke of the pen and the creation of $30 billion from the FED; Bear Stearns, and thus the world, was saved. Now these titans appear before the Senate with nothing more than excuses.

It was more like a circus than a serious hearing.

After watching three hours of explanations and obfuscations this was the message I came away with:
- The system we violated with bad practices was going to fail.
- The entire world would have been negatively impacted by such an occurrence.
- We stopped it from happening so end the stupid questions and just say thank you.

Instead of seeing a group of contrite and humbled men whom had just looked into the abyss of all our worst financial nightmares, I witnessed more of the arrogance that brought us to this point in the first place.

My fears were not dissolved or resolved by the hearings.

It is clear that if they didn't act, according to all who testified, the consequences would have been “dire”. The entire system hung in the balance on March 15th. But should it have?

Can we as a nation afford to go about business as usual while the heat is temporarily off when there may well be other Bear Stearns, which with a few well placed rumors and a little bit of nervousness may create another end-of-the-world financial scenario requiring more intervention?

These hearings did yield some useful information. On top of the $29 billion rescue of Bear Stearns, the FED also made a $25 billion loan to JP Morgan. The way I do the math JP Morgan ended up with all the assets and liabilities of Bear Stearns, allowing the assets to shore up their balance sheet, while the liabilities increased by merely $1 billion.

From day one I firmly believed, and still do, this whole Bear Stearns crisis was a way to save a much bigger player in our financial world, JP Morgan. Just take a look at the exposure JP Morgan has in credit and interest derivatives. According to Weiss Research, 387% of their capital is exposed. Yet our Fed, with the blessing of the Secretary of the Treasury and the cooperation of the SEC just gave them $54 billion?

Is this the reward for being such good stewards of investor and depositor money?

Overnight the value of JP Morgan stock surged, creating new cap value far in excess of any liability JP Morgan would have incurred by taking over Bear Stearns.

They have already realized billions in profit and for what?

These hearings on Capitol Hill Thursday, just like all hearings our elected officials hold, was a joke!

No lessons were learned and nothing will be done to address the underlying problems that caused the mess in the first place. Every time questioners got remotely close to exposing the truth surrounding this shady transaction, the confidentiality agreement between the FED and JP Morgan was invoked.

We will never know what really happened the day the financial world almost ended.

So expect to see more tactics politicians allow the Central Bank to employ to keep you “safe”. Political expedience will just give you more of what you want. More credit, easier requirements and artificially low interest rates as the FED inflates the next balloon. First it was equities in the 90's, followed by the bust in early 2000. Next it was real estate, followed by the housing slump we are now in. Who knows what the balloon du jour will be, but you can bet your bottom dollar there will be another.

In the end our cost of living and our taxes will go up. We will have to work harder and harder for less and less as the Federal Reserve and their Congressional enablers continue to inflate a system with more and more fiat money.

The average American must realize the only person who will take care of them is them. Thus, live within your means, save money and diversify your investment portfolio and savings accounts so when the day comes that we do have a collapse you will be prepared.

One thing is for certain. A collapse will come sooner or later. No balloon can be inflated forever.

Note: Our founders fought and died in 1776 and again in 1812 to ensure we would never have a central bank controlling the nation's finance. Our Constitution expressly reserved the right for Congress to create money. Lincoln said doing so would save the people interest. And yet today your life, and in large part the world, is controlled by central bank in the hands of some very powerful people.

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