Monday, March 17, 2008

JP Morgan bails out the United States, again 

In 1895, 113 years ago, J.P. Morgan and his eponymous bank bailed out the United States.

In 1895, at the depths of the Panic of 1893, the Federal Treasury was nearly out of gold. President Grover Cleveland arranged for Morgan to create a private syndicate on Wall Street to supply the U.S. Treasury with $65 million in gold, half of it from Europe, to float a bond issue that restored the treasury surplus of $100 million. The episode saved the Treasury but hurt Cleveland with the agrarian wing of his Democratic party and became an issue in the election of 1896, when banks came under withering attack from William Jennings Bryan.

In a much more complicated economy and under morally hazardous conditions, JP Morgan has done it again. The interesting question is whether the political reaction from the populist wing of the Democratic party will be the same, and whether it will have the same result in November.


By Anonymous Anonymous, at Mon Mar 17, 11:58:00 AM:

Yeah, but why? All the US has done is to again divorce risk and reward. My bet is that, all over the world, there are guys thinking, "how can I get some of that Uncle Sam guarantee shifted to cover these crooked schemes?"
What's so bad about Bear failing? What's so bad about the next 12 investment bankers failing?
Every weekend, there are guys in Las Vegas who have lost every cent they own and that their small business owned at the crap tables. We going to bail them out too?  

By Blogger TigerHawk, at Mon Mar 17, 12:03:00 PM:

Actually, Anon, the stockholders were all but wiped out -- they probably would have gotten some value in a prepacked bankruptcy, so this is not much different. Not sure that in this deal there is the moral hazard you are fretting about, at least from the perspective of Bear's equity.  

By Blogger Escort81, at Mon Mar 17, 12:23:00 PM:

The point of the bailout (the Fed part of it) is to prevent the infection from spreading, and to have the underlying integrity of the financial system remain intact, for the time being, anyway. The ability and wherewithal to do this flows, at least in part, from New Deal era legislation. As TH points out, the equity in Bear is pretty much wiped clean, but the deal provides a substantial backstop for the debt and permits many existing counterparties to continue their relationships, or at least gradually unwind their positions.

I thought Democrats liked government intervention in the financial markets in almost any form. And don't populists of either party like it when Wall Street types start to loosen the rubber seals on the windows on 22nd floor?

Or would they rather the whole system came crashing down?  

By Blogger Who Struck John, at Mon Mar 17, 08:44:00 PM:

Escort81 has the right of it - the Fed intervened through JP Morgan Chase in order to prevent disorder and panic in the marketplace. The deal allows the positions to be unwound in an orderly manner.

But his last question is telling. You see, the true believer class warfare types really would like things to come crashing down ... except that they have no idea of the horrors that would really mean. They do not understand that a true system collapse would lead to everyone experiencing the Grapes-of-Wrath ... and that such conditions typically give rise to a tyranny, and never give rise to a social justice utopia.  

By Anonymous Anonymous, at Tue Mar 18, 12:41:00 AM:

And why should we continue to support the evil UN we should quit paying taxes to these crinimals and tyrants  

By Anonymous Anonymous, at Wed Mar 19, 06:31:00 AM:

Am I to understand that you think a loan from JP Morgan to the US Treasury is the same as the Fed Reserve bailing out Wall Street? Perhaps the point is being missed that the Federal Reserve is a private banking system that normally loans money. The entire Financial Services Industry just went to the bank to talk about how to prevent declaring bankruptcy. The place that has generated wealth for America no longer has any wealth. This is not good.  

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