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Bear Stearns Bailout – What are they thinking?



Bear Stearns Bailout – What are they thinking?

Having lived through the real estate mess in the late 80’s, I think the current Fed action to rescue Bear Stearns is wrong!

The fact is that Bear made many investment decisions based on obtaining higher returns for their investors. With abnormally higher return comes additional risk. If the government helps firms that bet wrong – what type of message are we sending? This penalizes the companies and investors that played it safe and invested wisely, though earned less. It is just “not fair”.

Yes, I understand that a run on banks and investment firms and funds would not be pretty, but how many actions will they make, and how far will the Fed go to save others from disaster and then how much will it cost the taxpayers?

Let’s get real. You want more return, you take risks, and then you can make more money — or lose it. Let the markets run the game. At the end of the day, there will be winners and losers, but the government will not be footing the bill.

What consequences will occur if we let the markets handle this mess? Some banks, funds, and financial institutions will sell at fire sale prices – meaning that some investors who chose not to take the risk will get good deals. At the end of the day, assets will be priced fairly.

Yes, I am worried about inflation, deflation, recession, the dollar, and interest rates. The US government and the Fed agreeing to step in worries me a lot more. It will prolong the pain – and could cause this disaster to be exacerbated. Bear took the risk: they were a huge player is mortgage securities, provided lines of credit under terms that did not reflect their risk, and they made bad bets. They owned EMC Mortgage Services, one of the more aggressive subprime mortgage services, did credit swaps, and underwrote loans with little regard to solid lending practices and policy. If the assets were sold at wholesale prices, then the purchasers would be more inclined to bail out and to renegotiate with consumers who owe the money. Helping here just postpones the inevitable.

Which will be the next company the Fed tries to save? How many of these institutions will the US government prop up? How long will this drag out, and what will the final bill to the US taxpayer be? The message being sent is wrong. If you play with fire, if you are reckless with your investments, then you should suffer the consequences.

I hope that someone at the Fed stands up and makes the tough choices.

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