Here’s some non-professional economist reflections after the bailout guarantee of Bear Stearns, followed by JPMorgan’s Federal Reserve-guaranteed buyout.
First, are there any more Bear Stearns out there? If so how many?
Answer: Who knows? May be the Morgan buyout calmed the financial sector down enough for other investment banks to have a little time to get their shit in order. Maybe not.
Second, if there are other Bear Stearns out there who’s going to buy them out?
Very unknown. JPMorgan ain’t going to do that twice. Other than Goldman Sachs, I don’t know of too many other major financial institutions that aren’t fairly exposed to loan problems or other monetary illiquidity. Foreign sovereign wealth funds have already made clear they won’t make more major U.S. financial institution investments without something akin to a guarantee. And, if Federal Reserve Chairman Ben Bernanke made a guarantee to a Chinese or Arab sovereign wealth fund, he would be publicly crucified on Pennsylvania Avenue.
Third, what if we have another Bear Stearns, or even close to it, and it can’t be bought out?
Short of allowing bankruptcy, the Fed would have to consider taking such an institution into receivership. Of course, that would be the final nail in the mythology of the free market, not that this would stop the Bernankes and Greenspans of the world from touting the free market. Other banks and investment organizations would have to swallow hard, but they would eventually bite the bullet.
Fourth, what’s ahead on the financial sector jobs front?
As I blogged yesterday, Morgan will probably cut about half of Bear Stearns’ 14,000 jobs. I’d look for another 7,000 to be shaken out of other financial institutions by the end of this year.
I do know that major players on the Dow will turn a cold, sharp eye at other financial institutions this week. It’s going to be predatory world out there.
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