Good thing we bailed out Bear Stearns.
Hate to think what could happen had we not.
Lehman Brothers Holdings Inc. might have filed for bankruptcy, Merrill Lynch & Co. might have simply disappeared in a forced sale, credit insurer American International Group Inc. might get an emergency loan from the Fed, the government might have to nationalize Fannie Mae and Freddie Mac, and who knows what would happen to banks, including giants such as Washington Mutual Inc.
“The U.S. is on top of the situation,” said President Bush in March, attempting to calm markets after the Bear Stearns bailout. “Our financial institutions are strong and our capital markets are functioning efficiently and effectively.”
Federal Reserve Chairman Ben Bernanke, in early April, added: “Much necessary economic and financial adjustment has already taken place. And monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year.”
Also smacking his hands as if he had just saved the world was Treasury Secretary Henry Paulson. “I don’t mean to sound Pollyannaish,” he said in May. “I do believe our economy will be growing at a faster pace at the end of the year than it is now.”
Despite his firm’s looming extinction, Lehman chief executive Richard Fuld in April promised “the worst is behind us.” Merrill Lynch CEO John Thain made a similar pronouncement in January. Bear Stearns execs had said it, too.
Then there was Christopher Cox, chairman of the Securities and Exchange Commission, who said that Bear Stearns did not fail because it ran out of money. “This was not a lack of capital. It was a lack of confidence,” he said.
Rumor mongers. Short sellers. Market manipulators.
They were the ones who did this — not the brilliant decision-makers at Bear Stearns who were simply trying to finance America’s ownership society by taking on subprime mortgage loan portfolios and other toxic debt securities.
Cox responded with new restrictions on short-selling stocks of about every major investment bank as well as Freddie Mac and Fannie Mae.
No sense letting shorts melt down the rest of the U.S. banking industry with their greedy, vicious lies.
It’s one thing to cheerlead the markets and scapegoat the contrarians. It’s another to ignore a looming financial crisis. Or the possibility that trillions of dollars’ worth of exotic debt contracts might suddenly unwind.
“When a person gets an infection, it is generally a good idea to treat the infection before it . . . spreads or turns into something like gangrene,” said Lynn Turner, who served as chief accountant at the SEC from July 1998 to August 2001.
Recall that as Wall Street’s largest firms began taking write-downs for mortgage-related securities in early 2007, they were also paying their executives tens of billions in bonuses — many of which were attributable to fees from securitizations and debt offerings.
“The regulators should have woke up, dug deep into the banks and Wall Street firms under their supervision, and acted quickly to get on top of the losses,” Turner said. “It would have been even better for the regulators to have come out of their stupor a few years earlier and prevented the stupid managers of Wall Street and banks from engaging in Russian roulette by making loans that would never be repaid, all in return for record bonuses.”
I am not sure America would have stood for such blatant government intervention in the free market at that time. But at least we had the foresight to bail out Bear Stearns.
Al Lewis: 201-938-5266 or al.lewis@dowjones.com
