Wednesday, March 18, 2009

A Year after Bear Died

Bear Stearns died a year ago. Its stock was sold for $2 per share to JP Morgan. That was a shocking offer to market. We though the wires had a typo, they probably meant $20. A lot of wealth got destroyed, a lot of people got unemployed at that time. It was tragic!

Looking back, it seems naïve of us that we got shocked by what happened then. We lived up seeing much worse. Bear employees and stockholders actually got lucky in some ironic sense. $2 stock offer was raised to $10. Much better than $0 it would have reached otherwise. Most of the employees who were laid off found jobs elsewhere. The job market was not as bad at the time.

Still, it was not that hard to predict that economy and markets would get worse. Despite the two month long rally following the Bear’s fold into JP Morgan’s hands, this was a clear sign that the credit crisis had gotten to a new stage. Already, the government was the only hope, only reasonable solution out of this crisis. Over those months, many financial firms resorted to distortions to minimize their damage. History showed that a financial crisis was always costly, very costly.

Yet, things could have turned around by the end of 2008. It was not certain but possible. Paulson committed huge mistakes in September 2008. His mistakes were avoidable. He saved Bear Stearns because it was a system-critical player and then he let Lehman go bankrupt. Even though Lehman was several times more inter-connected or critical than Bear, he did not seem to have the wisdom or courage to do the same for Lehman.

I was surprised at that time not so much by Lehman’s bankruptcy but by the inaction of the US government. They did not seem to have a plan ready to put to action. Everyone knew after Bear Stearns, Lehman was next. Fed knew it! They asked even hedge funds about their exposure to Bear Stearns *and* Lehman Brothers in March 2008. Six months is plenty time to develop contingency plans.

Perhaps, you could say, the government was indeed prepared. Let Lehman die, but save AIG. Either there was no plan, no preparation or this indeed was the plan itself.

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