“Network,” captured the pent up frustration and public outrage the nation was feeling toward an economy that had slipped in to a vortex of hyper-inflation and skyrocketing interest rates. Following the formation of OPEC, oil supplies were scarce and prices at the pump were stratospheric. It was not unusual to see desperate motorists camped at their local filling stations awaiting the arrival of the fuel truck, just so that they could fill their tanks.
Near the end of the film, in a scene etched into the memory of every moviegoer, disheveled newsman and national icon Howard Beale, launches into a tirade decrying the ills and corruption of a world gone mad. Rather than sit back, passively accepting their fate, Beale urges his viewers to go to their windows to yell the immortal line, “I’m mad as hell and I’m not going to take it anymore!”
On Monday, as the stock of Wall Street giant Bear Stearns fell 94%, J.P. Morgan Chase, with the backing of the Fed, stepped in to buy this former lion of the financial world for a pittance --- $2.00 per share. This was the deal of the century for J.P. Morgan! Not only did it acquire Bear Stearns enormous book of business for a song, it did so without risk. At $2.00 a share, with the Fed underwriting the deal, J.P. Morgan can simply flush away the bad debt Bear Stearns was carrying as a result of its ill-conceived subprime expansion, and hang on the gems still remaining in the failed bank’s portfolio.
In January, the five leading investment banking firms on Wall Street, including Bear Stearns, handed-out nearly $39 billion in bonuses to their top execs. These bonuses largely were tied to the record fees generated by the banks' subprime businesses. While these banking execs were toasting their good fortune, however, the Fed was quietly propping up the same Wall Street banks by absorbing nearly $400 billion in flawed subprime mortgage assets.
When the gavel finally came down on the J.P. Morgan “rescue,” and Bear Stearns slid into oblivion, no one asked whether the executives of the failed firm planned to return their billion dollar bonuses. No one asked what would become of the thousands upon thousands of shareholders, whose investment in the Wall Street giant had turned to dust. No one asked whether it was the role of the Fed to prevent Bear Stearns from collapsing into bankruptcy.
The significance of the silence was not lost on many Bear Stearns executives who readily agreed to the fire sale. They understood very well, that in the event of a bankruptcy, the courts would force them to return their billion dollar bonuses. The choice was simple --- return your Masarati or screw the shareholders with the taxpayers footing the bill? Face a potential stock manipulation inquiry by the Securities and Exchange Commission or retire quietly to your home in the Hamptons? It was a no brainer!
Is it the Fed's role prevent the failure of an investment bank that should have understood the risks it was injecting into its portfolio? No where in the the Fed’s mandate is there a license to prop up failing Wall Street firms. Rather, the Fed's prime fiat is to keep our currency sound. With the dollar falling to all time lows against the Euro and multi-year lows versus the Yen, it’s evident that the Fed has been asleep at the switch.
Can we, or more aptly, should we permit the government to keeping printing money as the dollar falls? Do we continue to allow the Fed to step in before other Wall Street Banks tumble? Aren’t we simply putting off the inevitable? If there is a natural order to things, shouldn’t the weak be permitted to perish? Otherwise, as history has shown us time and again, the drop will be deeper and more prolonged.
Japan is exhibit one. When the bubble burst, the Japanese central bank stepped in to prevent major financial firms from failing. It continued to print money. The result was a deflationary cycle that lasted for nearly twelve years. Japanese historians now refer to this dark economic period as the “lost decade.”
Wall Street can’t have it both ways. Either it’s the law of the jungle where only the fit survive or it’s not. If my business fails, because I’ve made imprudent choices, the government won’t bail me out. Just because their businesses are arbitrarily deemed “vital,” Wall Street should not be entitled to special treatment. I say, let the law of the jungle prevail!
To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.
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