Jim Rogers’ Opinion On Bear Stearns’ Bail-Out
[youtube]http://www.youtube.com/watch?v=wXUU_lyb0Lc[/youtube]
While Jim Rogers has never had a good opinion of Fed Chairman Ben Bernanake, he seems particularly upset with his latest actions. He thinks that he had no right to bail-out Bear Stearns (BSC) to the tune of $230 Billion of the US taxpayers money. He claims that if BSC had filed bankrupcy,the billions of dollars of bonuses paid out in January would have to be returned. So effectively Bernanke facilitated a bail-out so that his pals on Wall Street could continue to drive their Maseratis! Sounds a bit too conspiracy-theory to me, but in principle I agree with him. It’s not fair that the Wall Street guys take huge risks to make huge amounts of money, but when they mis-calculate, instead of being punished by the market (in terms of bankruptcy and financial ruin) the Fed just bails them out.
He also admits that he’s been buying agriculture for a while, since its the cheapest commodity and that he’s also out of the dollar. He also thinks that gold should be over $2,000, adjusting for inflation. The short term dollar rally isn’t fooling him, he’s using it to liquidate the rest of his dollars.
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March 24th, 2008 at 6:09 pm
I agree with you – it’s a bit too oonspiracy-theory for me. Maybe Rogers had puts on BSC?
The Fed didn’t exactly “bail-out” Bear (though the revised price of $10/share) definately helps the shareholders. But a bailout would have preserved Bear as a bank, or at least enabled it to continue to operate until a real auction could have taken place. Many of the employees will wind up out of work. It is hard to see how bankruptcy would have been better for shareholders than the deal they are getting, even if the bonuses were to be returned.
What the Fed did was protect Bear’s counterparties – for a maximum loss of $29 billion they prevented a forced liquidation of the hedge funds to which Bear was prime broker. It has been estimated that together with Bear’s own commitments, these hedge funds were counterparties to $4 trillion in derivative contracts.
Allowing that much disruption was simply not an option. JPM will take a large write-down (around $6bn) in acquiring BSC and apparently now pay over $1 billion more for Bear. If the purchase produces the profits for which JPM hopes it will turn out to produce solid returns, but not outrageous ones.
March 25th, 2008 at 6:13 am
If you talk to Bear’s shareholders and employees they will tell you it was not a bail out. A bail out as I see it is making something whole again and in this case Bear owners are never whole and lost most of their investment so I fail to see it as a bail out.
I have no problem with what the fed did. The fed mandate is to protect the financial institutions and regulate them. Their actions here is not unwanted but you can argue that the fed did a poor job regulating the banks in the first place.
March 25th, 2008 at 7:42 am
Sami & Doug…you guys have no idea what you are talking about.
Essentially you paid for this bailout (I will cover why it is a bailout below) by the Fed devaluing the money you currently have by printing more money. This cost YOU money.
Sure allowing Bear Sterns to go bankrupt would cause a lot of turmoil in the market, but it would recover, and fairly quickly once the excesses are out. Plus, not allowing Bear Sterns to go bankrupt tells the other investment banks to keep doing the samething that got us here, as the Fed is telling them “will save you.”
It is a bailout, as Bear Sterns would have gone to zero without the Feds help. All their assets were fleeing with their clients and no one was hiring them to do the investment banking side of any deals (they had no assets or leverage), thus no fees were being generated. They obviously aren’t making any money from their investments right now, so the drop in fees would have meant they would eventually go under. This cycle, unfortunately, is almost impossible to break, as it is a crisis of confidence. Would you have risked your millions with Bear or with Goldman Sachs right now? It’s rhetorical, as we all know the answer.
Note that the very brief reasons I gave here are only a very very very small part of the entire debacle.
March 25th, 2008 at 8:04 pm
[...] The events of Bears and Sterns/JP Morgan/Federal Reserve remains fresh in the minds of many. More popular, common place thinking believes this was nothing more than high paid executives, trying to protect their year bonuses. [...]
March 27th, 2008 at 10:08 am
This is a great topic. Jim Rogers is always a good solid straight shooter. I enjoy his interviews.
April 24th, 2008 at 9:00 am
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March 14th, 2009 at 10:53 pm
[...] sure we’ll tax our way out of it). The government bails out investment banks, rescuing the bonuses of top management (which would have been reclaimed in bankruptcy) but refuses to do the same for homeowners swamped [...]