I have been watching the developing government bailout of the investment banks and other financial institutions involved in the sub-prime mortgage mess with growing anger and amazement. It is becoming increasingly likely that the federal government will pour billions, if not trillions, of dollars into saving and stabilizing countless numbers of brokers and investors who are in financial difficulty because of the widespread fraud in the mortgage markets.
How is it that people who made unwise investments or advised other people to make unwise investments are going to be subsidized by taxpayer dollars? I can understand, although not necessarily agree with, the notion that residential borrowers who find themselves either in or on the verge of foreclosure should be helped by the federal government. In many cases, these borrowers seems to have been victims of fraud and misrepresentation.
But I do not see why brokers and investors who sold and profited from these mortgages and the securities collateralized by them should be given a government handout. Yet this seems to be a very real possibility.
Although both the United States and British governments deny any plans concerning bailing out investors in the sub-prime market, rumors are flying that talks on this exact topic are now ongoing. The justification for such a bailout would appear to be that without it, investors will be forced to realize large losses and the markets will be destabilized.
But why does this possibility of loss exist in the first place? Isn't it because the involved brokers and investors were either greedy or imprudent? Will the federal government also make up losses for investors who made stupid investments in other markets? Even more to the point, if those who are now in trouble because of investing in high-risk mortgages are bailed out, what incentive do they have to stay away from such risky investments in the future?
I have read with some interest the stories about the J.P. Morgan purchase of Bear Stearns, one of the central players in the sub-prime fiasco, at a low price financed by the Federal Reserve. I find it fascinating that the investors in Bear Stearns, particularly those who work for the company, are crying foul at this government-financed sale because the price is too low.
Many of these employee-stockholders have been earning seven- and eight-figure salaries for years based upon the companies financial activities. Are they willing to pay back the salaries they received in earlier years, salaries dependent, in part, on sub-prime lending and brokerage? I doubt it. The fact is, without the partial federal bail-out it's very possible that the company would go under and their investment would be worthless.
In the past decade, Americans seem to have forgotten that high-risk investments are high-risk precisely because you may lose your money. That's why such investments carry high rates of return. When you gamble, you have to accept the possibility of loss.
It would be inexcusable for the government to ask the tens of millions of Americans who do not invest in such stocks and bonds now to pay taxes to save those who have been gambling on such investments. Perhaps, next time, those who suffer losses in this financial debacle will behave more sensibly. It's a lesson that needs to be learned.
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Daytrader23 (anonymous) says…
I agree that we should let one bank fall for their mistakes, but anything more than that would cause a mass sell off and investor fear would grip the markets sending them into a tail wind causing a crash that would make the great depression seem like a minor correction. The Fed must supply liquidity in these situations in order for the markets to function properly.
Which is worse, using a few billion to save a few banks from falling or doing nothing and sending the U.S economy into a depression? Think about how long the U.S has been surviving off of credit, not just the people but the Fed as well. They have been printing money out of thin air for decades and we are only in round three of this credit crisis. We still have nine rounds left. The fed has done everything it can to stop this crash from happening and I applaud them for it because the U.S would be in a lot more trouble if it wasn't for their actions. Most of the U.S is now supplied by foreign debt and if we scare them off the U.S goes from superpower to completely broke in a matter of a few days.
Most people don't realize what a fragile line the U.S is walking on right now. But if it breaks, which it can, there is a long hard fall to the bottom which will take decades to recover from. (this is worse case scenario) Fortunately the Arabs would not let their best customer fall too hard, or would they?
P.s I have no clue what I am talking about so don't take me serious, I just trade off of charts and rumors.
merrill (anonymous) says…
Send the CEO's and their executive managers to San Quentin. Remember Neil Bush. Jeb Bush got a sweet multimillion dollar deal from a Florida insitution. The savings and loan scandal put a lot golden agers back in the work force. Wherever there is a Bush there is financial scandal.
The republican party stands by their criminals.
Put them all in San Quentin and no golden parachutes!!!
Godot (anonymous) says…
totally agree with Hoeflich.
Read this; if you agree, then sign the petition.
http://market-ticker.denninger.net/20...
Godot (anonymous) says…
The action of the Fed in the Bear Stearns case may have been illegal on several points. It appears Bernanke and Paulson were acting as arbitrager on JP Morgan's behalf, putting poison pills for Bear in the contract, renegotiating when JP Morgan refused to take on Bear's toxic loans, and withholding from Bear the fact that, prior to the negotiation, the Fed had already voted to allow institutions like Bear to borrow money from the Fed. Had Bear known this, they probably would not have agreed to the deal. There are other irregularities, as well.
Follow my link posted above, and sign the petition.