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April 11, 2008
Supposed Fat Cat bailout
Alice Rivlin has an op-ed, Money Well Spent, in the New York Times today defending the Bear Stearns bailout.
"Never mind that the supposed Fat Cat "bailout" was a disaster for Bear Stearns stockholders, and that the idea of a "moral hazard" risk - that other investment banks will be tempted to emulate Bear Stearns - is preposterous. Never mind that if markets head back up and the collateral can be sold at a profit, taxpayers may lose nothing."
Separately Dean Baker in his weekly rundown of housing bust news makes the case for dropping the word "supposed" from the phrase "Fat Cat bailout".
"The Fed has opened its discount window to the investment banks, allowing them to borrow at a below-market interest rate. Currently this rate is 2.5 percent. Commercial banks have long had this option, but in return, they had to submit to transparency requirements and regulations. In other words, if taxpayers were going to back them up, banks needed to act responsibly. Unlike the commercial banks (banks where people have checking accounts and get mortgages), the investment banks are not subject to reserve requirements and do not have their books reviewed by the Fed. That's not all. When the Fed rescued Bear Stearns, Fed Chairman Ben Bernanke said that he would also come to the rescue of any other major investment bank in trouble. This promise is incredibly valuable. Mr. Bernanke effectively told the creditors of the other investment banks that they don't have to worry about Morgan Stanley's, Lehman Brothers', or Goldman Sachs' creditworthiness. If these banks aren't good for their debts, the Fed is.To understand the value of this guarantee, consider going downtown and selling huge insurance policies that would earn you billions of dollars in fees. When someone asks whether you can really pay off on any claims on these policies, you get to tell them, "Don't worry, the Fed is backing them up." The customers will happily hand over the cash knowing that they have the best guarantee they could possibly find.
Cheap money and free guarantees: That's what we're giving to the investment bankers. So, when we see their huge mansions, private jets, and impressive foundations, we should all feel a sense of pride. After all, we paid for them."
--Mark Price
Posted by Price at April 11, 2008 07:01 AM