Just Let Bear Stearns Die

Friday morning Jim Cayne got to his office at Bear Stearns, flipped the switch and the lights did not come on. Despite all the assurances from the chief over the last two weeks, one of the world's largest investment banks was out of money.

Cayne started scrambling, calling around the corner to JP Morgan, and got Ben Bernanke on the phone.

As all this was going down, and the stock market tumbled, the Decider was a few blocks away at the Economic Club doing some chipper cheerleading, warning against any federal mortgage bailouts, and giving good marks to the Fed.

Ben is doing a heck of a job.

Of course, the source of the run on Bear Stearns, was the fact that the bear had been hibernating, as it sat on a big pile of worthless securitized mortgages.

For the first time in seventy years, the Fed bailed out a bank. Using JP Morgan as a conduit, the Federal Reserve is going to loan Bear Stearns money, and it will be secured by their worthless mortgage instruments.

In the end it is almost a certainty Bear Stearns will be sold, either in whole or in multiple parts, and it is almost a given that our Arab friends will, once again, be the primary purchasers (unless they have soured on investing in America, even if it is a fire sale).

Some people are having difficulty understanding how bailing out an International Bank is just fine, but helping out Joe Schmuck from Wichita, with his predatory mortgage, is wrong.

It is quite true if Bear Stearns hit the skids it would give rise to a massive tsunami throughout the world's economy---and no one gives a shit about Joe Schmuck's bank balance.

However, if this is a capitalist system, and it is not really, everyone who has been stupid or unlucky, should, through natural market forces pay the consequences.

In order to get the economy back on track, it is necessary that all the investments that have, for the past seven years, been making obscene nonproductive paper profits, based upon what at it's core is a lie, crash and burn. From the residue will arise a Phoenix, not so prone to be dependent on ponzi games and foolish, predatory loan sharking.

The vengeful god of Capitalism says that Joe Schmuck has to pay his dues too. He foolishly entered into a loan agreement with terms he could never meet, or used his home as a personal piggy bank to buy cool crap from Wal-Mart.

But what is so irritating to many is that the patter of George Bush sounds so much like Herbert Hoover seventy years ago. The federal government will bailout the bank which fucked up, but not the schmuck on the street.

The truth of the matter is , before anything can get better, everyone involved in the credit mess has to take a fall. But in America, there is a safety net for all debtors, no matter how big or small they are.

Our country was founded by debtors. Many people came to the colonies to avoid the harshness of debtor prisons in England. The founders believed, after they pay their dues, those who have made a financial ruin of their life should get a second chance,

And so it is not surprising there is a constitutional right, which my fellow libertarian friends never like to talk about, designed to soften the harsh hand of capitalism.

It is bankruptcy.

Taxpayer money should not be used to bailout Bear Stearns, and it shouldn't be used to bailout Joe Schmuck. They both have to live with the consequences of their ill advised bargain and actions. But they should both be treated humanely—not only for their own sake, but for the sake of all of us and the economy.

Chapter 11 reorganization or Chapter 7 liquidation is available to Bear Stearns, and they may end up there anyway if the petrol bullies do not wish to bail them out.

Ben Bernanke should have directed Mr. Cayne to the courtroom on Broad Street. That court would have devised a plan to mitigate the damage to the bank's investors and creditors alike.(Of course, Bear Stearn's management has not really liked how the Bankruptcy Courts have treated them recently. Last year, after the bankruptcy of their hedge fund, Manhattan Investment, the Bear was ordered to pay investors $160 million because—well, the judge thought there was fraud).

But, Joe Schmuck should be able to get a little relief from his financial stupidity as well. The bankruptcy courts are able to rewrite the loans on almost every transaction, from credit cards to yachts and vacation homes. But they are prohibited from doing so in the case of loans secured by personal residences.

If it is possible to salvage a mortgage so that both a distressed homeowner and the stiffed lender come out better than just a foreclosure, that makes a lot of sense all around. And , just like the relief available to a terminally ill bear, it does not cost the taxpayers a thing.

But Bush does not want to give even bankruptcy relief to distressed homeowners. The idea was struck down in the Senate last week. But the president, and his minions, are quite willing to spend our money, secured by pledges of worthless collateral, to keep a big bank out of the bankruptcy court.

This type of protectionist hypocrisy is the kind of thing advocated by modern Republicanism, and when they do it in the name of free market economics, it is a lie, and rightly pisses off all the Joe Schmucks—as well as every Tom, Dick, Carol and Becky.

And it makes no economic sense. Both Joe Schmuck and Bear Stearns need to crash and burn.

But since we are purportedly a civilized and rational people, there is a way to soften the blow to both of them, their creditors, and the overall economy.

It is a way that costs taxpayers nothing, and does not involve federal manipulation of the markets.

Once again, the constitution and thoughts of the Republic's founders provide guidance on this political and economic problem.

If only we would listen.