Bear Stearns Should Have Guessed Better

There’s been a lot of commentary that the recently exploded Bear Stearns “should have known better.  “Really?  How can anyone be sure that they know better about how much leverage to use in a financial system that’s based on deliberately mysterious fluctuations in leverage?  One can certainly argue in retrospect that Bear Stearns made plenty of mistakes, but the “should have known better” comments have a strong element of whistling in the dark.  (Silly Bear, they used leverage.  Can you imagine?  Oh well, just one (cross your fingers) of those things.)

We have immense leverage in our system starting right down in our central bank bones.  We eat, drink and breathe leverage.  (And if it seems like we’re not getting enough, we cry to the market nannies in the Federal Reserve System for more.)

It’s never a steady predictable stream of leverage– that would be too easy (no pun intended).  Instead, the Fed tries to “stay ahead of the curve” and make “surprise moves” to manipulate “market expectations”.  With these Fed moves as a perpetually shifting funhouse floor on which to build our economic judgments, how confident can we be that we know better?  We’re getting an answer to that question, courtesy of the Federal Reserve (even as we’re shifting the blame to a supposed market failure.)

In our financial system, we all have to make decisions about how much leverage to take on.  Take no leverage, and you’ll fall behind and die as your money is debased right out of your hands.  It’s particularly tough on business.  You can do everything right about your core business, but misjudge your use of debt– too much or too little– and you’re toast.  If you’re in demand as a wage slave instead, then you can relax– but that’s only as long as you never retire.

I feel pretty sorry for the people at Bear Stearns.  They’ve been sacrificed twice on the Federal Reserve’s now thoroughly blood-soaked alter.  Once during the monetary policy whip-sawing (still ongoing), about which Bear supposedly should have known better, and again during the company’s forced liquidation, when to all appearances any choice to shop for a better offer were squelched by the Fed.  (Maybe that’s another area where a “knowing better” mythology helps us out– it deleverages our empathy, giving us a short-cut away from imagining the next shoe dropping smack on top of us.)

The Bear Stearns story, all whistling aside, is not very extraordinary.  Somebody has to explode in every cycle, or why would the expansionary credit good times ever end?

What is extraordinary is that even now we’re not questioning our occult, erratic (and highly leveraged) monetary system. Instead, we point to a few companies, industries, or government officials scattered here and there, who “should have known better”, or “made a mistake”, or “got behind the curve”.

There was an item on MarketWatch giving comments from Lehman Brothers’ CFO about the Fed’s new broader access policy for the Discount Window.  “I think as shareholders our ability to access that form of financing (and) to do more business for clients is incredibly interesting.  It presents a very good opportunity.”

That probably isn’t (or shouldn’t) be what the Fed had in mind, although the idea that the Federal Reserve can finely control where the credit it creates goes is a silly (if nevertheless commonly held) conceit.

The Bear Stearns folks who read those Lehman Brothers’ comments while preparing to pack up their stuff must be thinking, “It sure would have been nice to have that ‘good opportunity’ a couple of weeks ago.  Maybe we could have been offered for sale at $50 a share instead of $2, and been saved some pain”.

It just goes to show, you never know (better).

By Les Lafave

Banking Reform –

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57 Responses to “Bear Stearns Should Have Guessed Better”

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