Bearly Stearn: The Bailout of Bear Stearns

I want you all to stand up, open a window and yell, "I'm as mad as hell and I'm not going to take this any more". If we are truly headed back to the 70's we may as well quote the classic movie, Network.

Friday's bailout of Bear Stearns (BSC) may very well begin the domino action that many have feared and the central bank is determined to avoid. We should all be concerned and frankly a bit mad.

I get the concept of why BSC is too big to fail if you will, but I'm not sure the benefits of rescue outweigh the negatives. Are we not simply rewarding poor and reckless behavior?

Nobody complained of course when profits at BSC were sky high during the housing boom. The lending binge generated fees of ungodly proportion and shareholders enjoyed a bull market that was propelled by the entire financial sector.

And yet when the music stops here we are left holding the bag. By we I mean American citizens that once enjoyed the fruits of a transparent and inherently fair economic system. Now, our reputation has and is being damaged by trying to fix something that ought not be fixed.

What is scary to me is that the central bank knows that the damage caused by its actions may take years to repair and yet they continue to act in this way. What does that say about their perception of the alternative?

If BSC were allowed to fail the outcome then must be worse than what we now face as a result of intervention. I guess the loss of credibility outside our borders and runaway inflation are acceptable consequences.

What in the world then are we to do as investors in this environment?

by Kim Stup |  03/17/08