This weekend was the most anticipated of the year for college-basketball fans: Sixty-four teams were chosen to participate in the annual NCAA Tournament, a.k.a. “March Madness.” But our nation’s financial leaders spent Saturday and Sunday dealing with another kind of insanity: our failing economy.
The Fed and the heads of our financial institutions knew they had to act, and act fast, after Wall Street investment firm Bear Stearns, which is heavily invested in mortgage-backed securities, announced on Friday that it was essentially bankrupt. Knowing the turmoil that would erupt in the financial markets on Monday if Bear Stearns’ woes weren’t addressed, the leaders were forced to put in some serious overtime.
On Sunday, the solution came, with JPMorgan Chase agreeing to buy Bear Stearns at the bargain-basement price of $2 a share. A year ago, Bear Stearns’ stock price was $170, according to this New York Times story:
The deal, done at the behest of the Federal Reserve and the Treasury Department, punctuates the stunning downfall of one of Wall Street’s biggest and most storied firms. Bear Stearns weathered the vagaries of the markets for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now afflicting the American economy.
Bear Stearns was famous for taking chances with clients’ money, according to The Times:
Even up until last week, Alan “Ace” Greenberg, Bear Stearn’s chairman for more than 20 years and a champion bridge player, still regaled its partners over lengthy lunches about gambling with the firm’s money in its wood-paneled dining room. It was such gambling that eventually was Bear Stearns’s undoing. The firm’s solvency came into question late last week as clients stopped trading with it and anxiousness about its exposure to subprime mortgages spread across Wall Street.
But that wasn’t all. Late Sunday, the Fed announced additional actions, reports The Times:
Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion loan guarantee to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street. In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.
So, the bailout begins. Bear Stearns and other lenders gambled our money and lost. When that happens to you or me — in Las Vegas, for example, or in a March Madness tournament pool at work — we’re responsible for the consequences. Guess who’s responsible when lenders gamble? Us again! Where do you think the bailout money comes from?
As to whether these measures will help us avoid recession, I’d say that’s less than a slam-dunk.