ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Bear Stearns – First Steps to Socialism?

Updated on April 8, 2008

Bear Stearns – First Steps to Socialism?

I’m not sure how else I could characterize the intervention of the Federal Reserve in what appears to be an illegal as well as unregulated manner. The Federal Reserve System was never intended to provide bail out finance to struggling private investment companies. It certainly has every appearance of vastly exceeding its remit and authority.

Let’s recap for a moment. Bear Stearns is /was an investment bank, the type of bank which has nothing to do with the everyday bank that you and I use, which has insurance provided by the FDIC to protect our savings. Bear Stearns does not fall under this category, even though the borders were somewhat blurred by a law passed in 1999 which among other things basically rescinded the 1933 law which separated commercial banking (our type of bank) from investment banking. Need I remind you that this 1933 law was as a result of the Great Depression, when many savers lost their money? Bear Stearns has made some interesting mistakes, including letting two hedge funds fail in the middle of last year, and, when it declared a loss in the quarter, the CEO realized it was time to go, and resigned in January. Word on the Street got out, and investors were being advised in some quarters to divest themselves of their BS holdings.

Now the Federal Reserve Act mandates the Reserve to maintain a sound currency, and was later expanded to touch on employment. It does not say that it is supposed to bail out anyone who gets in financial trouble on Wall Street, or anywhere else, for that matter. It is well known that the heads of these companies have substantial bonus checks allocated, some even during the latest problems in the market, and they seem to behave with impunity and now with the help of government support to ensure that their company does not collapse, despite unsound business practices.

The unfortunate fact is that the system was virtually bound to fail at some point, because of the way sub-prime mortgages have been packaged together to make them acceptable to investors, a process called “securitization”. Sub-prime mortgages are risky, which is why they are called sub-, or less than, prime, but the financial machinations meant that the true nature of the investments was masked to those who didn’t ask the right questions.

The Federal Reserve has taken on, in underwriting the securities involved, the risk of the sub-prime loans, and hence has taken it on for the American citizen, who will ultimately pay for any default in those loans. In other words, the Feds are “socializing” the risk to the investment bank, but are leaving the profits “privatized”.

The fact is that there is nothing that is “Federal” about the Bear Stearns crisis – it’s just the nature of the business that the bank is highly leveraged, and that means that any glitch in the value has significant consequences to confidence. Bear Stearns was leveraged about 30:1, Morgan Stanley is leveraged about 32:1, and I bet they are feeling a whole lot less vulnerable now that the Feds have declared their hand.

Officially, the Feds by their action have averted a panic in the markets that would have caused some severe problems. Arguably, however, the Feds have added to the further destruction of the dollar by taking on devalued loans, that cannot be backed by equity. In fact, as Andy Beal, a Texas banker explains, Bernanke, and by extension, the American public, may have taken on more than he knows. Many AAA mortgage bonds have contracts that permit the loan servicers to advance payments on behalf of the defaulting homeowners at interest rates of 12% or more, for years to come. These “servicer advances” are repaid first from foreclosed home sales. This means that foreclosed home sales may result in little or no proceeds, or even a liability to the holder of the AAA mortgage!

All this takes place against the background of millions facing financial difficulties and even foreclosure, which makes you wonder why the Feds don’t do something similar to help the people at the root of the problem, the defaulting borrowers?

However, the real questions that are overlooked in the rush to “save” another financial institution are

- should the US government subsidize securities dealers?

- should the government decide the winners on Wall Street, by timely action?

- should the government have such power over private businesses?

- and aren’t governments that own the banks called socialist?

To have your say and learn about the stock market, you need to head on over to Stu Whisson at, who is a trading expert, and always gives personal replies. His free trading course at the website is worth looking at, too!


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)