ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

What Does Bear Stearns Mean for the Future?

Updated on April 8, 2008

What Does Bear Stearns Mean for the Future?

When the investment bank Bear Stearns was bailed out of a collapse by the Federal Reserve’s intervention, a number of observers took careful note of the action. First the background – as an investment bank, Bear Stearns was not in the same category as the high street banks, with which the Feds do have some proven connection. The FDIC, or Federal Deposit Insurance Corporation, is a government agency that insures the deposits of investors for a maximum $100,000 per depositor per institution. This means that if the bank fails, the depositor is covered up to this amount against loss of his savings. This leads to the typical advice that you should open an account at a different bank if you deposit more than $100,000. With a retirement account, the insurance may be up to $250,000.

The FDIC was founded in 1933 as a response to the thousands of bank failures that happened during the Great Depression, stripping innocent members of the public of their life savings. Since then, no depositor has lost any insured funds when their bank failed. The FDIC is funded by premiums that the banks pay, and not directly from the government. It is also responsible for identifying and monitoring risks to the funds, and thus to interact with the banks. The Glass-Steagall Act which established the FDIC also called for separation of commercial and investment banking, which is why an investment bank such as Bear Stearns, is not directly covered by the FDIC.

Some say unfortunately, this Act was repealed in 1999 by the Gramm-Leach-Bliley Act, which allowed banks to offer a range of services including insurance and investment. This blurring of the distinctions between the two types of financial institution means that the Fed is now intervening and providing value to nearly worthless securities.

Not that this was an easy or obvious step. A few years ago, Charles Kindleberger wrote a study about financial mania and crises, in which he asserted the Fed should “always leave it uncertain whether rescue will arrive in time or at all, so as to instil caution in other speculators, banks, cities and countries”. He did however feel that the government should be the ultimate saviour, with this proviso “A lender of last resort should exist, but its presence should be doubted.”

The sub-prime crisis has unfolded, brought on by reckless lending to less than perfect borrowers, who are now proving the validity of their lower ratings by defaulting on their mortgages. This availability of more borrowing power than previously unleashed has been instrumental in fuelling the housing bubble, and pushing house prices up so that houses were thought to be an ever growing equity source. With the inevitable collapse as realism came to the fore, and foreclosures climbed, the continued existence of the government sponsored housing companies Freddie Mac and Fannie Mae has been questioned, and the Feds responded on March 6th, saying that it was “absolutely not true” that the government would offer backing to them to help ensure liquidity through the sub-prime repercussions. In this way, the Feds wanted to make its intervention in doubt.

This was widely regarded as a drastic measure, and sure enough, already there has been an about turn in the Feds actions. Within two weeks from that announcement, the Feds felt that they had to supply up to $200 billion to these agencies, to maintain their liquidity. They also lent $30 billion to JPMorgan to supply the capital for a bailout of Bear Stearns at $2 per share – since increased to about $10, but still very far below the peak price last year of around $160.

So what, I hear you say? While, from one point of view, you may agree with the Fed action, in order to prevent a run on all companies that borrow heavily against securities, you need to understand the other side of the equation. With no legislative authority, the Feds have decided for the first time ever to lend to companies that are not banks, but securities dealers who do not even accept deposits. By accepting the collateral of securities, and underwriting it, the Fed is now committed to the past underwriting decisions of the investment banks. In effect, they, and, by extension, the American public, have taken away the risks of dealing in securities, but left the profits privatised. Employing leverage, which investment banks do at as high a ratio as 30:1, doesn’t now carry any risk, as in the end the Feds will guarantee liquidity.

If the intricacies of high finance and the stock market leave you thirsting for more knowledge, there’s a very good free primer in trading available at www.insightsupport.com .

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com 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: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    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 googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    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)
    Marketing
    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.
    Statistics
    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)