What do markets mean?
Bear Stearns was selling for $56 a share Thursday.
On Sunday night, JP Morgan was buying the company for $2 a share.
Major news networks are in a frenzy.
Analysts are analyzing.
Government officials are rushing to reassure.
But what does it all mean for regular folks with 401(k)s and a mortgage to pay?
For a translation, we talked to Russ Kashian, UW-Whitewater associate professor of economy.
Q: What is Bear Stearns?
A: “It’s an investment bank,” Kashian said. “It’s kind of a clearinghouse.”
The company holds bonds, stocks, mortgages and other investments.
“They put them on their shelves, like cans of beans; they hold them like inventory,” Kashian said.
But it’s not enough to hold them. The company takes that inventory and uses it as collateral for other loans and investments.
Q: So what happened?
A: Remember in “It’s a Wonderful Life?” A run on the bank sent investors into a panic before George Bailey calmed them down with an inspirational speech.
Bear Stearns inventory of “beans” is only worth what the market says it’s worth.
“In August, that market seized up,” Kashian said.
The housing bubble stopped bubbling. The market became uncertain.
Bear Stearns holdings dramatically decreased in value. The banks that had loaned it money on that collateral started to call in their loans.
Of course, when one bank calls in its loans, the rest follow suit.
No one wants to be left holding the bag—especially when the bag is empty.
The Federal Reserve and the U.S. government swiftly approved the all-stock buyout to complete the deal before world markets opened.
A full collapse of Bear Stearns might have completely crushed already dwindling confidence in the global financial system, which has frozen up after last year’s collapse of the subprime mortgage market.
Q: Should we panic? What about my 401(k)?
A: Don’t panic, Kashian said.
“If you were planning to retire tomorrow, I’d tell you to wait six months,” Kashian said. “Everyone makes it sound like Armageddon. But I’ve lived through this three times, and I’m 47. It happens about once every seven or eight years.”
Q: How did this happen?
A: “People have to recognize that these guys are like gamblers,” Kashian said. “In Las Vegas, it’s considered bad form to take money off the table when you’re winning. These guys just keep winning and putting all their money back in.”
It’s not too much to call it hubris.
“People need to be financially prudent,” Kashian said.
National experts agree.
“This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we’re probably heading into a recession,” said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners.
Material from the Associated Press was used in this story.
Mar 17, 2008 at 9:39 p.m.
Suggest removal
Sounds like another sweet deal for the top execs who get to walk away from the mess that they presided over with fat bank accounts. I saw some of them on C-span whining about how much money they were losing and expecting us to share their pain. Meanwhile, the people they were serving and the taxpayers will suffer the real pain.
Mar 17, 2008 at 6:15 p.m.
Suggest removal
I don't know that brushing it off as something that "happens every seven or eight years" is really the way to look at it. In the 19th century laissez faire period, that was just the way things were and if you were bankrupted, tough beans. But the Fed was intended to PREVENT these regular panics and crashes. Yet every recent instance is tied to a specific market becoming deregulated -- savings and loans, investment banking, interstate banking, real estate commoditization. It really isn't a mystery why the bubbles happen -- it's because people can get away with doing it.
.
JP Morgan Chase has allocated $1 billion -- in addition to its $250 million purchase price -- for SEVERANCE to Bear Stearns executives.
.
You know, the people who ran the place into the ground.
.
Meanwhile, the thousands of Bear Stearns employees -- who by company tradition and policy had their 401(k)s heavily invested in company stock -- are left with no jobs and no retirement fund and no parachute or cookie jar.
.
This isn't something that happens by accident. On Wall Street they call this "privatizing gains and socializing losses". When the money's there, take it out of the kitty and put it into your personal assets, like a house. When the money's NOT there, the taxpayer bails you out.
Mar 17, 2008 at 10:56 a.m.
Suggest removal
This is a nicely condensed and simplified explanation of an extraordinarily complex subject. Everyone has been hearing about Bear Stearns, but very few people have had the faintest idea what it all means. Excellent initiative and writing, Gazette!
Before you post a comment, consider this:
Note: GazetteXtra.com does not condone or review every comment. Read more in our User Policy AgreementPost Comment
Commenting requires registration.