By Anal_yst
A week or so ago, Gretchen Morgenson wrote a piece about the JPM/Bear Stearns deal,
WSJ: "Rescue Me: A Fed Bailout Crosses a Line" which opens:
WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year? Or all of the above?
Stick around, because we’ll soon find out. And it’s not going to be pretty.
While she makes some valid points, she coincidently omits information critical to understanding the situation, so I decided (admittedly, after a few drinks, so keep that in mind) to suggest, as politely as possible, she take a few things into consideration in the future:
Gretchen,
Your piece, "Rescue Me: A Fed Bailout Crosses a Line" borders on being little more than populist, sensationalist reporting. You have supplied us with no new useful information, but take plenty of time to point out the unfairness, so-to-speak, of this situation. Had you taken the opportunity to use your significant position in the journalism world to actually produce something useful, maybe you would have discussed, for example, the $13 TRILLION in notional value outstanding of Bear Stearns' derivative contracts. Are you suggesting that it would be a prudent idea to let Bear default on these contracts? This one fact in-and-of itself strongly suggests that every other stakeholder in the Financial system, nay, the Economy itself has a vested interest in, at the very least, making sure this situation ends in an orderly unwind. This, of course, doesn't even begin to dive into the consequences of Bear's clients accounts, should they enter into bankruptcy. As of the end of 2007, Bear had over $40bn of client assets in their Wealth Management unit. Between SIPC and FDIC, how much do you think taxpayers would be on the hook if even a fraction of those assets were Federally insured? These are merely two very obvious issues at hand, which you very conveniently disregarded while writing this article. I have read your material for years and have great respect for what you've accomplished, but this article is so appalling, such an unfortunate example of irresponsible journalism, that I'm having trouble believing it was even your hand that penned it. This article sounds more like one of the liberal comments found more often on NY TImes' Deal Book than the work of an intelligent, respected professional such as yourself. I hope that going forward, you make an honest attempt to understand that the effects and consequences of letting Bear Stearns fail will extend further than the walls of 383 Madison, into virtually every crevice of the economy. Much to the chagrin of liberal anti-Wall Streeters, the fallout would not be limited to a bunch of rich robber-baron types. Quite the contrary, governments, corporations having nothing to do with high finance, and countless individuals would all feel the effects. Your article clearly, and unfortunately, exemplifies what it means to cut off one's nose to spite one's face. Yes, I will agree, the principle of avoiding moral hazard, of letting those who have erred pay for their mistakes is noble, and one which we should, ceteris paribus, attempt to uphold. However, in doing so, we must take into consideration the full body of facts, which you have so conveniently avoided with this article. I hope that going forward, you make an earnest attempt to do a bit of research before penning such potentially influential pieces.
Regards, Anal_yst
To clarify, the point of my letter was not to explain every last detail, but to merely point out you can't decry moral hazard without taking into consideration the facts of the matter in their entirety. Did I kiss-ass a little? Yea, just a bit, oops. Anyway, here is her response (note, apparently she didn't feel comfortable addressing her msg to Anal_yst, ha):
Thanks for taking the time to write. I am sorry that my article did not live up to my previous work, in your view.
I agree that the $13 trillion in derivatives was at work in the bailout but did not mention it because BSC does not break the positions out into interest-rate swaps, CDS etc so on deadline it was hard to identify what the notional amount really represented.
Anyhow, I did not by any means intend to argue that BSC should be allowed to go bankrupt and with all the consequences of that on innocent clients and employees. I simply meant to indicate that we are in a different world when a firm that is central to the mortgage arena like Drexel was to junk bonds is not allowed to fail. I am sorry if that did not come through clearly.
You should know that I take my "significant position" in the world of journalism extremely seriously.
Thank you for your candor,
Gretchen Morgenson
Whats important in this issue, that we've seen countless shareholders whining and commentors (see Dealbook, Deal Journal) complaining that they're getting shortchanged in the acquisition, is that if JPM/the Fed hadn't stepped in, Bear likely would have lost the vast majority, if not all of their valuable prime brokerage and clearing clients, not to mention withdrawals of client assets in their wealth management group. (impressive run-on sentence eh?). The effects of such proceedings would be felt far and wide. So, while I agree, we should avoid moral hazard at almost any cost, we should definitely not do so at the expense of opening a Pandora's box onto the world, that is, in letting Bear fail. Thoughts?
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