The federal government has seized Washington Mutual. This is the largest bank failure in history.
I'm finding this out late at night, so my thots are brief. I don't bank there, so it doesn't affect me directly.
My first thot is that this makes the bailout picture more interesting, and hopefully brightens the picture a bit, because it takes a large degree of uncertainty out of it. JPMorgan Chase is taking over WaMu's retail operations, and writing down $31 billion in the process. That's a large chunk of change that the government won't have to worry about. So this is one example of the free market actually working. The strong and smart survivor, i.e. JPMorgan Chase, is taking over the weak failure. With the government's help.
It's not good news for WaMu, but it might be slightly good news for the rest of us.
Showing posts with label JPMorgan. Show all posts
Showing posts with label JPMorgan. Show all posts
Thursday, September 25, 2008
Thursday, March 27, 2008
Ten Days That Changed Capitalism
That's not my own hyperbole in the title of this post - that's the headline of a Page One article in the Wall Street Journal. The world is different now.
It is different in ways that many people don't appreciate. "[the changes from the government] are shrouded in technicalities and buried in a pile of new acronyms."
The political implications are, to use an overused word, profound.
This is a dramatic change in ideology. Conservatives argue that the market works best when it is regulated as little as possible. This mess has illustrated, very clearly, the limitations of that ideology. And it's only going to get worse. When will we know it's gotten worse? When the bill shows up. "The next step, if one proves necessary, is almost sure to require the explicit use of taxpayer money." How happy are Main Street Americans going to be about bailing out people on Wall Street? Not very. I'm not going to be thrilled about it, that's for sure.
That's the article on Page One: change is coming, get used to it. But one interesting effect of reading the Wall Street Journal is that you notice a strong divide between the reporting and the editorial pages. Sometimes it's an almost schizophrenic divide. Just a few pages behind the article articulating just exactly why and how the government intervened in the market is an Op-Ed piece challenging the need for new regulations. Allan Meltzer, a professor at Carnegie Mellon, lets us know that "Mistaken regulation contributed greatly to the current problems in financial markets." So apparently it wasn't investment bankers making bad decisions based on greed and an unclear comprehension of how much risk they were taking on. It was the government trying to regulate the markets. I was under the impression that establishing guidelines for behavior was the government's job. I was also under the impression that responsible citizens generally try to follow those guidelines. Not according to Prof. Meltzer: "The first principle of regulation is: Lawyers and and politicians write rules; and markets develop ways to circumvent these rules without violating them." So it's fine to violate the spirit of the law, as long as you're within the letter. This is sort of like Martin Luther King's doctrine of civil disobedience, but for yuppies instead of oppressed minorities - if you consider the law unjust, try to work around it. Ethics be damned, apparently.
I've worked for investment banks, and I can actually understand this point of view. Investment bankers are paid to be creative with finances, and that requires knowing where the lines are in the law. And who among us has not thot about just how fast you can drive above the speed limit without getting caught? But instead of being creative on the legal side, shouldn't the core principle of a business be figuring out how to deliver value for your client? I notice that JPMorgan was in a position to take advantage of Bear Stearns' mishaps. I'm fairly certain that's because JPMorgan understood that one purpose of the rules and regulations that structure our financial system is to protect people from themselves. Those laws exist because when people get themselves into trouble, they tend to get other people in trouble, too. That's also why we have laws against drunk driving.
What's particularly bizarre about this line of argument is what happens when you apply it to the world outside of Wall Street. Let's try this. Should we have laws against robbing banks? No, because robbers are constantly innovating, and we can't catch up with them. Maybe we shouldn't try. Or how about this: if you install a burglar alarm in your house, some thief is just going to figure out how to get around it. So don't even bother locking your doors!
Conservatives occasionally make a good argument for too much regulation having unintended consequences. But the solution is not to abandon the enterprise of regulating the financial system or to take the path of least resistance. Conservatives, I think, are getting desperate to protect their franchise before it becomes so invalidated that they lose elections. But it's not working, because reality is intruding. You can tell people are is this kind of trouble when their arguments are sloppy. Prof. Meltzer uses a couple of examples of the failure of regulation that I think fail to prove his case:
They didn't see the problems at Enron because Enron was engaged in criminal activity and hiding it from regulators. And the dot-com bubble was a normal market correction - too many people got too greedy, and did not exercise good judgment. That's unfortunate, but there was very little illegality. And I don't know enough about the Latin American debt problems in the 1980s to comment intelligently. But the point is that this is a red herring - these are not examples of failures of regulation.
Mr. Meltzer seems to think that those who took the risks should pay the price - enforcing the moral hazard. Let the government keep this system afloat, but don't save anyone's skin who doesn't deserve it. Let the idiots hang. It's a harsh perspective, but not unusual (and, for some, I'm sure, a nice revenge fantasy).
What I find bizarre is the idea that we shouldn't bother trying to learn the proper lessons from this so that we can prevent it from happening again. It will happen again, the good professor seems to be arguing, so what's the point of even trying? Because, Prof. Meltzer, trying to find the proper range of regulation to balance the disparate needs of society is the purpose of democracy.
"The past ten days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse."
It is different in ways that many people don't appreciate. "[the changes from the government] are shrouded in technicalities and buried in a pile of new acronyms."
The political implications are, to use an overused word, profound.
"A Republican Administration, not eager to be seen as the second coming of the Hoover administration, showed it no longer believes the market can sort out the mess."
This is a dramatic change in ideology. Conservatives argue that the market works best when it is regulated as little as possible. This mess has illustrated, very clearly, the limitations of that ideology. And it's only going to get worse. When will we know it's gotten worse? When the bill shows up. "The next step, if one proves necessary, is almost sure to require the explicit use of taxpayer money." How happy are Main Street Americans going to be about bailing out people on Wall Street? Not very. I'm not going to be thrilled about it, that's for sure.
That's the article on Page One: change is coming, get used to it. But one interesting effect of reading the Wall Street Journal is that you notice a strong divide between the reporting and the editorial pages. Sometimes it's an almost schizophrenic divide. Just a few pages behind the article articulating just exactly why and how the government intervened in the market is an Op-Ed piece challenging the need for new regulations. Allan Meltzer, a professor at Carnegie Mellon, lets us know that "Mistaken regulation contributed greatly to the current problems in financial markets." So apparently it wasn't investment bankers making bad decisions based on greed and an unclear comprehension of how much risk they were taking on. It was the government trying to regulate the markets. I was under the impression that establishing guidelines for behavior was the government's job. I was also under the impression that responsible citizens generally try to follow those guidelines. Not according to Prof. Meltzer: "The first principle of regulation is: Lawyers and and politicians write rules; and markets develop ways to circumvent these rules without violating them." So it's fine to violate the spirit of the law, as long as you're within the letter. This is sort of like Martin Luther King's doctrine of civil disobedience, but for yuppies instead of oppressed minorities - if you consider the law unjust, try to work around it. Ethics be damned, apparently.
I've worked for investment banks, and I can actually understand this point of view. Investment bankers are paid to be creative with finances, and that requires knowing where the lines are in the law. And who among us has not thot about just how fast you can drive above the speed limit without getting caught? But instead of being creative on the legal side, shouldn't the core principle of a business be figuring out how to deliver value for your client? I notice that JPMorgan was in a position to take advantage of Bear Stearns' mishaps. I'm fairly certain that's because JPMorgan understood that one purpose of the rules and regulations that structure our financial system is to protect people from themselves. Those laws exist because when people get themselves into trouble, they tend to get other people in trouble, too. That's also why we have laws against drunk driving.
What's particularly bizarre about this line of argument is what happens when you apply it to the world outside of Wall Street. Let's try this. Should we have laws against robbing banks? No, because robbers are constantly innovating, and we can't catch up with them. Maybe we shouldn't try. Or how about this: if you install a burglar alarm in your house, some thief is just going to figure out how to get around it. So don't even bother locking your doors!
Conservatives occasionally make a good argument for too much regulation having unintended consequences. But the solution is not to abandon the enterprise of regulating the financial system or to take the path of least resistance. Conservatives, I think, are getting desperate to protect their franchise before it becomes so invalidated that they lose elections. But it's not working, because reality is intruding. You can tell people are is this kind of trouble when their arguments are sloppy. Prof. Meltzer uses a couple of examples of the failure of regulation that I think fail to prove his case:
"Regulators did not see the chicanery at Enron. Nor did they prevent the dot-com bubble or the Latin American debt problems in the 1980s."
They didn't see the problems at Enron because Enron was engaged in criminal activity and hiding it from regulators. And the dot-com bubble was a normal market correction - too many people got too greedy, and did not exercise good judgment. That's unfortunate, but there was very little illegality. And I don't know enough about the Latin American debt problems in the 1980s to comment intelligently. But the point is that this is a red herring - these are not examples of failures of regulation.
Mr. Meltzer seems to think that those who took the risks should pay the price - enforcing the moral hazard. Let the government keep this system afloat, but don't save anyone's skin who doesn't deserve it. Let the idiots hang. It's a harsh perspective, but not unusual (and, for some, I'm sure, a nice revenge fantasy).
What I find bizarre is the idea that we shouldn't bother trying to learn the proper lessons from this so that we can prevent it from happening again. It will happen again, the good professor seems to be arguing, so what's the point of even trying? Because, Prof. Meltzer, trying to find the proper range of regulation to balance the disparate needs of society is the purpose of democracy.
Sunday, March 16, 2008
This is bad
JP Morgan is buying Bear Stearns. For $2 a share. This is not a firesale. This is a volcano sale. Or whatever is more intense than a firesale. JPMorgan is paying $236 million. That's chump change. All of the marble and artwork in the Bear Stearns HQ is probably worth several million. Apparently Bear Stearns was effectively bankrupt last Thursday. So JPMorgan is basically buying the physical assets, they're not even paying for any of the cash that Bear has in its bank accounts. They're not paying for that cash because, apparently, there isn't any. The price is at a 93% discount to the price of Bear's stock at the Friday close. That is just unheard of. Even Enron took a while to completely collapse. JPMorgan is doing the world a favor buying Bear. They are keeping the world's financial system from going kaflooey. I don't know much about how Bear Stearns is integrated into the financial system, but if it went bankrupt, more than a few people would panic.
Things are going to get worse before they get better. There will be more than a bit of schaudenfreude at work here, as people who don't work on Wall Street take a certain perverse pleasure in watching people in expensive suits lose their jobs.
This may have an interesting effect on the Democratic presidential race, because Hillary, after all, is the Senator from New York. And that ain't going to be a good thing in the immediate future.
This will be one of those times which test the fiber of American democracy. I have a theory that the system of American democracy is designed to sustain the maximum damage that can be inflicted on it. Because everyone in this country has, theoretically at least, an equal opportunity to participate in the system, everyone has, again theoretically, an interest in preserving the system. This will be one of those moments when people with a vested interest in the system are going to have to band together to protect some elements of it. This will not threaten the existence of this country, but it is going to have a much wider impact than many people suspect at the present. This is going to be bad.
Things are going to get worse before they get better. There will be more than a bit of schaudenfreude at work here, as people who don't work on Wall Street take a certain perverse pleasure in watching people in expensive suits lose their jobs.
This may have an interesting effect on the Democratic presidential race, because Hillary, after all, is the Senator from New York. And that ain't going to be a good thing in the immediate future.
This will be one of those times which test the fiber of American democracy. I have a theory that the system of American democracy is designed to sustain the maximum damage that can be inflicted on it. Because everyone in this country has, theoretically at least, an equal opportunity to participate in the system, everyone has, again theoretically, an interest in preserving the system. This will be one of those moments when people with a vested interest in the system are going to have to band together to protect some elements of it. This will not threaten the existence of this country, but it is going to have a much wider impact than many people suspect at the present. This is going to be bad.
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