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Beyond Bear Stearns: Risks Remain But Paulson Creates False Sense of Security

Posted May 29, 2008 10:39am EDT by Aaron Task in Investing, Newsmakers, Recession, Banking

The Wall Street Journal's series about the "final days" of Bear Stearns concludes today. The highlight of the last installment is the level of involvement Hank Paulson took in not just brokering the deal, but determining the price JPMorgan would pay.

"I think this should be done at a low price," the Journal quotes the Treasury secretary as saying.

Given his comments after the fact -- "the Bear Stearns situation has been very painful for the Bear Stearns shareholders. So I don't think that they've been bailed out here" -- it's clear Paulson wanted to avoid the perception of a bailout.

But in trying to prevent "moral hazard" -- the excessive risk that follows government intervention in the market -- Paulson (and Ben Bernanke) created some, says Dan Colarusso, managing editor of Portfolio.com.

This is not an academic exercise or ancient history because the fallout from the Bear Stearns bailout is still with us. Recent developments with KeyCorp, AIG, and Lehman Brothers (among others) remind us the financial system remains shaky at best. But many traders are confident that if the Fed determined Bear was "too big to fail" it's safe to speculate -- even if the fundamentals aren't supportive.

24 Comments

bon85
bon85 - Thursday May 29, 2008 11:18AM EDT

If I am correct the railroads, airlines, farmers have all been bailed out by the fed's before. If there are enough checks and balances on the bailout and it is scrutinized sufficiently why not. We are spending 12 billion per month in the Middle East. I would rather put our money to work here than over there. Irac needs to deliver on the oil to the US since we saved their world and will rebuild it in the near future. Let's get some of tax money spent here and let the politicians fight among themselves about how to divide the rest after McCain vetos all the unecessary spending. Then we can possibly get the congress/politicians to figure a way to cut taxes to allow for spending. I could go on but who is reading this anyway; not the ones who can make a difference.

Yahoo! Finance User
Yahoo! Finance User - Thursday May 29, 2008 11:19AM EDT

It's not speculation when you have a continuous, renewable source of "free money" available through the term auction facility. They don't even have to tell the public who's getting the money - it's none of our business anyway. Right????

Yahoo! Finance User
Yahoo! Finance User - Thursday May 29, 2008 11:28AM EDT

They can criticize Paulson, the Fed, etc concerning the Bear Stearns deal, but just after that deal, the market seems to have hit a low..... I trust the market movement more than the doomsday-negative experts on tech ticker. And who let Blodget out of jail?

Robert
Robert - Thursday May 29, 2008 11:42AM EDT

It would be more pursuasive if popbon5 could spell Iraq.

michal
michal - Thursday May 29, 2008 11:48AM EDT

Farmers,airlines havent created their own problems,problems in Bearn Stern and other financial were created by financial ingeeners,they are abusing laws of free market ,if you are doing so you must pay price faster or later,burn just second bubble in few years and investment banks created huge money flow into commodity markets,this is not place for money managers and your money,they suppoustu invest in new technology,ideas,most efficient buisnessmans,this is speading up everyone growth,investing huge money in commodity is rising price and slowing this what suppuostu be supported by them,this is another abuse by huge investment banks and financial regulators,wchich are connected toghether by many bounds,if you abusing free market you are pying a price,its structural problem in wall street ,big problem,we are looking in third bubble in just 8 years,where was FED policymakers ,when wall street created trillions of paper money and gave them to people wchich never suppoustu get them,or much less,dont tell me FED official havent notice this what happen in credit market,this huge flow cheap money to the market,wall street created this,FED sended very bad masage especialy to international community,you can steal,abuse and you wont pay for this,

michal
michal - Thursday May 29, 2008 12:00PM EDT

Farmers,airlines havent created their own problems,Bear Stern and others huge banks or investment instytution are the ones who are responsible for Nasdaq,housing and commodity bubble right now.They are paying price because they are abusing free market laws,this is law of nature,where was FED when they were creating huge amount of paper money and giving them to everyone,this had to created problems,big investment banks in last few years by creations ETF direct huge amount of money to commodity markets,this not a place for speculators,huge amount speculative money in this place means huge abuse of supply and demand law,price is adequated to real market laws,this is another bad story,where are FED people,top washinghton economist,investment banks suppoustu invest in new ideas and people who are most efficient in buisness to sped up growth all of us,investing by money managers huge amount of money in this area is slowing everyone,its against this what for are investment banks created,where is top economist like Bernake,

michal
michal - Thursday May 29, 2008 12:01PM EDT

Farmers,airlines havent created their own problems,Bear Stern and others huge banks or investment instytution are the ones who are responsible for Nasdaq,housing and commodity bubble right now.They are paying price because they are abusing free market laws,this is law of nature,where was FED when they were creating huge amount of paper money and giving them to everyone,this had to created problems,big investment banks in last few years by creations ETF direct huge amount of money to commodity markets,this not a place for speculators,huge amount speculative money in this place means huge abuse of supply and demand law,price is adequated to real market laws,this is another bad story,where are FED people,top washinghton economist,investment banks suppoustu invest in new ideas and people who are most efficient in buisness to sped up growth all of us,investing by money managers huge amount of money in this area is slowing everyone,its against this what for are investment banks created,where is top economist like Bernake,

robert
robert - Thursday May 29, 2008 12:06PM EDT

Democrats and Republicans should all be replaced, the only thing they think about is their party or getting reelected, it is time they thought about the people of the U.S. . This means the citizens not the illegal immigrants and quit pork barrel spending.

michal
michal - Thursday May 29, 2008 12:32PM EDT

This is not about illegal immigrants but about failed macroeconomic polices,this polices created huge amount jobs in wrong sectors,and dismantled huge amount of jobs in real econmic sectors how is calling them Warren Buffet,this was about huge currency manipulations betwwen USA and Asia,the same is valid to Mexico,Asia was groving three time faster in many cases like China in last thirty years,in currency exchange rate showed the same growth,this was very wrong long term policy,today China is huge but very were Washinghton officials 10 years ago,this wasnt China goverment buisness to slow his country growth,USA could force CHina to adjust their currency to their fast growth,its the same with Mexico today,you invested huge money in Mexico in many sectors,they are growing much faster than you,they currency suppoustu be much higher,this would save many jobs here,and open market for many productd from here too expensive for them today,China currency is undervvalued about 40-50% to dollar,Japanese probably good 20% ,if this currencies would be in right levels adjusted by real market forces,you would be able to buy less their goods ,but how many more goods made by real economy they would buy from you,

Brett
Brett - Thursday May 29, 2008 12:49PM EDT

"Too big to fail" does not mean "too big to be diluted". I agree that Citigroup will never be allowed to fail. But, will implicit backing from the Fed also prevent shareholders at the biggest banks from being further diluted? THAT'S what I want to know, Aaron. To what extent is the Fed protecting CURRENT shareholders in these financials? By the way, I'd like to hear from Einhorn and Hintz.

michal
michal - Thursday May 29, 2008 01:17PM EDT

I think you are badly wrongCitibank like GS was one of the most importnant players in many big games and creations made by wall street,Europe after Nasdaq bubble removed huge amount of money from here,after Iraq war was second huge adjustment,after housing bubble third big adjustment in Euro,and this time followed Asia and rest of the world,this huge adjustment in currency means less involment here ,in Nasdaq and housing bubble huge amount of money dissapeared ,no one will invest here if you wake in the morning and you getting news your money are gone,or part of them ,and no one know where are they,this what happen with credit crisis ,big banks and instytutions werent even able to sell their investment,but when I look at Euro countries they procentage involvment was almost none,they lost maybe 10-15 billions dollars in more than 350 billions ,Switzerland and Greait Britain had huge losses,but they do not belongs to Euro zone,Big Japan companies began in last few months cut down on investment in America,they make long term moves,they do not make such decision for year in two,they look much further in future,they are doing the same what many Western European investors began to 7,8 years ago,your failed policies made them to do it,wall street games,having nothing to do with free market,you want them back you must change many basic structural things,without them, if Asia will follow Europe footprints you will fall off cliff very fast,ask yourself would bring money here if existing law is coverning up big chefts,especialy if have growing amount of places around the world where you investment is bringing better profit,USA lost just 20 % in year in value by adjustment in currency and others faster growth,you becaming smaller and smaller part of world,smaller means either less importnant,just 10 years ago you was twice more importnant than today,Asia and Europe huge companies and investors this not Red Cross ,they wont bring more money if you wont change your structural problems,you can still do it,but if you miss a point ,later will be much harder,this commodity bubble if wont stop this can triger sell off ,real crash of dollar,when I look at long term chart of dollar seems to me suppoustu go up a little in next few months and later will enter last leg down,probably later this year,

Aaron
Aaron - Thursday May 29, 2008 01:25PM EDT

bamajors - I think you know the answer to that. - Aaron Task

virginia
virginia - Thursday May 29, 2008 01:33PM EDT

As always we wait too long to act . Why do we alway wait until the problem is so big,ie. Oil ; Now we are playing catch-up and guess who suffers the most, we the consumers. We are the ones who sacrifice the most. Oh well guess we just hand it to our next president who won't know what to do either

michal
michal - Thursday May 29, 2008 01:43PM EDT

Not in Asia or Europe buisnes is making you weaker,Europe created in last 50 years very diffrent model of buisness,they are bringing to others to their levels,making them stronger,this makes them stronger either,this is law of nature,they just follow this ,if you make stronger someone you are stronger,if you make weaker someone you are weaker,this second option was true thru centuries in Europe,groups of people though if they take control of others and keep them weak ,this profits this groups,this is ilusionary profit,in reality this made them weaker either,this world is run by chain reaction,law cause and effect,everything is affecting everything,if you keeping down huge amount of others this doesnt benefit you,this is what wall street is doing,they are creaiting one after another story, they are weakening huge part of this nation and benefittting few not really,they do not benefit themself this is ilusion,if you build house of card can fall down very fast,if you build real wealth,real fundamentals you will be good,they builded up by they polices huge amount of ilusionary wealth,they are getting weaker either by this failed policy.you change your policy,structural things ,you will have to get thru some pain but if others will be stronger this will save you,but if you weaker others by stories like commodity bubble,this is not local story,this is weakaning entire Earth,and your own companies,those who are healthy,many of this companies has lot buisnees evwerywhere,Europe change ,smart people get there to power,they building their wealth by building themselfs and others and by abusing others,this is the way to go,

Yahoo! Finance User
Yahoo! Finance User - Thursday May 29, 2008 02:14PM EDT

Come on gilan69, tell us your real name. It's Borat isn't it? I knew it!!!

Karen
Karen - Thursday May 29, 2008 02:17PM EDT

What I found so interesting about the bail out was that it was the Fed's and JP Morgan. Watch the video and ask yourself: Who's really incharge. http://www.youtube.com/watch?v=_dmPchuXIXQ&feature=related Watch all 5, I am sure it will put some focus on what is really going on.

michal
michal - Thursday May 29, 2008 02:37PM EDT

But you are changing fast now,is huge group of big buisnessmans and politicians who are understanding this,I dont blame Bush or wall street,because I know reason why they are doing this,they were train do it,this was the way for many cenruties to do buisness,Warren Buffet 10 years on so popular meetings with his shareholders was talking about wrong policies of main street,macroeconomic wrong policies,this is not about blaming is about made this people understand,they what they do because they think they are right,cheap energy policy this is another huge problem,this seemed for many like heaven,in reality this is very destructive policy,if something is coming to easy for too many is destroying internal values and is weaking this people,I stand for cheaper oil in market but not for cheaper gasoline in gas stations,if get cheaper they not suppoustu lower gas price,becuse cheap energy ,too cheap energy brought people to wasting huge amount of resources and is slowing more efficient and cleaner technology developments,this you can transfer in better health,food ,cleaner air this everything you can transfer in better ,really better life,this way you would build and invest more in right sector ,wchich really would benefit you in future,in much more efficient economy,and right prices of energy is creating this,technology is around already,in Spain if you buiding house or apartment buiding energy must come from solar panels,this is in their law overthere,this benefits everyone,Ichecked lately USA and European car markets,is huge diffrence in efficiency of cars,in Europe they are selling millions of cars wchich makes about 50-70mpg ,this arent hybrids,they have smaler engines and capacity,would be to small for USA ,you driving more by way you buided up your communities,but you dont need 3,4 litter engines,you can change them for 2 l and most of you will be good,its matter of right energy policy and this weould benefit all of you,I hope good amount of people will get to right positions or existing will change directions for more correct on time,

james
james - Thursday May 29, 2008 02:55PM EDT

What we are seeing today is the result of stuffing our government with lawyers. What are lawyers good at? When are the american people wake up and realize that lawyers never produce anything. They are parasites on our country,yet we keep electing them to public office where they wreck havac on our society.

michal
michal - Thursday May 29, 2008 04:09PM EDT

You need lawyers and policy makers,they just must made policies working for you,they will decrease with time,you creating right local and international policies you must spend less on police deparment,security,lawyers, and many other things,I can see first sign of change ,big change,a lot people seems notice neccesity of change,Kenedy said lately ,world is changind,I LISTENED to Imelt ,chief of GE ,who was talking about changes wchich happened in last 10 year inside GE structure,they made right things ,this world seems to me is first time in history by globalization destroying boders slowly between countries and inforcing more correct laws ,wchich are much closer with real natural laws of free market and healthy compation,who benefits more and more everyone,natural selection is not about killing each others ,in our point of evolution is becaming a something like healthy and growing everyone compatiotion,I dont belive in geniusies,in good and bad people,I belive what I learn about Universe and laws running it ,if you going along with this laws you always good,this doesnt lokks to many in short term maybe like this,but true is if we would be run by real forces of free market ,not speculation,we wouldnt know what means world crisis or recession,in market run by this forces you can predict and just direction with high accuracy ,in market run by speculators and liears,you have jumps from one to another extrimes,we are wasting huge amount energy and resources for playing games and for wrong investition,is coming few powerfull forces and creating bubble in this or another sector,they coming to increaSE this bubble with predictions of light future,many of this guys coming with such stories they know they wont materialize in reality,someon invest in hoouse,infrastructer wchich isnt wrong investion,who winns on the end,this not only billions or trillions who dissapeared from markets ,this are either huge sources and energy invested in wrong sectors,this creating huge imbalace ,you have underdeveloped one sectors and overdeveloped another ,if this is done by forces of natury ,this never gets to far,you working less and have more,you can make much better choices,you invest in much more right direction

recession08
recession08 - Thursday May 29, 2008 04:59PM EDT

The local gas station is going broke does anyone have Paulsons number? The crooks have infiltrated the govt.

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