Dean Baker: Someone has to pay

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from the Guardian UK:



Someone has to pay
If the US taxpayer gets the pain while Wall Street keeps its gain, it's time for us to think about putting an end to those multi-million dollar salaries.

Dean Baker
March 31, 2008 8:00 PM | Printable version


The bailout for the millionaires and billionaires who brought their financial institutions and the financial system to the brink continued last week. The highlight was the renegotiation of the terms of JP Morgan's takeover of Bear Stearns. The buying price went up fivefold, fetching Bear Stearn's stockholders $1.2bn instead of the $236m in the agreement brokered by the Federal Reserve last week.

While Bear Stearns shareholders may still have been unhappy about their losses (the stock had been worth more than ten times as much a year earlier), in reality this was a very generous gift from US taxpayers. As an inducement to carry through the takeover, the Fed gave JP Morgan up to $30bn in guarantees, in case the bank has to make good on Bear Stearns' liabilities. In other words, JP Morgan is being given the opportunity to do some gambling, with the taxpayers committed to making good any losses. The money that JP Morgan paid for this privilege went to Bear Stearns shareholders, not the taxpayers.

Some of Bear Stearns shareholders made out quite well due to our generosity. High on this list is James Cayne, Bears chairman and until recently, its chief executive. Cayne saw the value of his stock increase by almost $50m as a result of the higher price paid by JP Morgan. To put the taxpayer's gift to Cayne in some context, this is approximately equal to what the amount paid through the Temporary Assistance for Needy Families programme to 10,000 working mothers over the course of a year.

Of course, Cayne and the rest of the Bear Stearns stockholders are not the only incredibly rich people benefiting from the taxpayers generosity these days. The Fed's actions are reining down taxpayer money all over Wall Street. When Fed Chairman Ben Bernanke rushed in to save Bear Stearns, he made two other important policy changes. He indicated a commitment to protecting other major investment banks and he opened the Fed's discount window to the investment banks. These are both huge taxpayer subsidies to these titans of free market capitalism.

The story of the discount window is straightforward. The Fed is allowing investment banks, who are subject to none of the restrictions or disclosure requirements of commercial banks, to borrow at a government subsidized interest rate. Currently the discount rate is 2.5%. Those seeking to refinance mortgages, most of whom are probably better credit risks these days than the investment banks, may want to call Mr. Bernanke and ask for the same deal. ......(more)

The complete piece is at: http://commentisfree.guardian.co.uk/dean_baker/2008/03/someone_has_to_pay.html

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1. Nite kick....

:kick: