Monday, March 17, 2008

Sharing Wall Street's Anxiety Attack

A panic attack can provoke a number of uncomfortable symptoms: Rapid heart beat; cold sweats; feelings of inadequacy; or an irrational uncertainty about your next move.
In short, everything Wall Street is feeling now.
But don't worry, be happy because Dr. Ben Bernanke is on the case and he's handing out the Xanax.
Easing the stock market's deepening sense of crisis is the primary reason the Federal Reserve Chairman is making an unprecedented effort to save Wall Street's hide. Bernanke has agreed to back up JP Morgan Chase's purchase of near-bankrupt Bear Stearns investment firm. The Fed, which lends to commercial banks, is now also making money available to other cash-strapped brokerage houses.
Nobody should be jumping for joy at this rescue strategy, least of all the American taxpayers who, in essence, are backing the Fed's play. Free market types will argue that Bear Stearns knew the risks of its investment and should go bankrupt, leaving its shareholders with nothing and its investors holding an empty bag. In bankruptcy, Bear would reorganize or liquidate.
In principle, I agree.
But in reality? Let's face it: We're damn frightened because nobody knows how bad this financial sickness will get. Ask yourself: How many other Bear Stearns' are out there? How pervasive is the sub prime lending mess? How financially fit and able are our largest banks or regional banks? Who's next to go over the edge?
There's talk that Lehman Brothers investment firm could be the next to face a cash crunch. (Lehman says liquidity is not a concern. That's what Bear Stearns said last week.)
The Fed is also scared and has to figure out some answers to these, and other, important questions.
In supporting the Bear Stearns buyout, and by pumping money into investment banks, Bernanke is buying time and paying for a temporary peace.
It may not work. Matters could get worse.
But right now, Wall Street is in need of a chill pill--even if it's an expensive one that's going to soon wear off.

(Illustration courtesy of brutepop.com )

2 comments:

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