Comments on: Is Bear Stearns The New Enron? The Answer Is Yes But Not For The Reasons Many Think

By: guest

guest — Wed, 19 Mar 2008 04:28:05 +0000

It’s true that the original J.P. Morgan testified to Congress that he valued character (trust) more than anything else (such as I suppose Greenspan’s econometric risk models now disavowed).
And Robert Shiller has suggested some interesting ideas about the housing market and stock market: it seems the accusations of fraud (and thus lack of trust) usually come AFTER the crash, as a sort of post-facto emotionally satisfying narrative of what people would like to think caused the event, surely not their own greed and fear but rather blame it on others, they get out not because of some rational assessment of supply and demand in the market but rather to avoid the embarrassment they see others endure.
In another exercise of behavioral (cognitive) economics, Harvard professors such as Iris Bohnet have proposed a concept of “betrayal aversion” where people take risks less willingly when the agent of uncertainty is another person (trust) rather than nature (risk). People from some cultures lack trust and have more betrayal aversion, but less reliance on abstract damages as in US law (guilt) and more on vengeance (against shame).
It doesn’t seem that this is useful in predicting panics or bottoms. But it seems clear that in a panic anybody who says “trust me” is asking for trouble. I think I know who I should trust, but I cannot quantify the risk, there is too much macro uncertainty. I’d like to be able to hedge my real estate risk but the hedge market is too small, not liquid, and terms too short.
In a bank run trust and risk go out the window along with the cash. Where do they go to?

By: guest

guest — Wed, 19 Mar 2008 04:27:42 +0000

How was Bear Stearns to know that risky investment in mortgage-based securities in the midst of a massive and irrational asset bubble, purchased with massive amounts of “leverage,” could result in a massive liquidity crisis?
Especially after the great performance the company delivered in 2007, earning likely HUGE sums in bonuses.
I mean, surely the crisis was a shock to everyone and likely hit late on Friday. It was completely unexpected for everyone, and there was nothing to indicate that there was a risk of anything other than eye-popping profits for all eternity!

By: guest

guest — Tue, 18 Mar 2008 22:36:18 +0000

My business is misunderstood but also is fundamentally trust-based. You can see me anytime and get your full money back. No, you can’t see my books, but the fine accountants I pay for will tell you my financial ratings are AAA, and I pay for insurance from some fine companies. However, you must get in on the deal right now as the market is going up rapidly and once you and your friends are in the value will increase forever, trust me –Charles Ponzi

By: guest

guest — Tue, 18 Mar 2008 14:26:16 +0000

“such a dramatic loss of wealth” wouldn’t it be more accurate to say “such a dramatic transfer of wealth”?

By: guest

guest — Mon, 17 Mar 2008 21:14:00 +0000

@1:35
It’s offensive that you use “Tyrone” working at “Chicken Shack” as an example of subprime problems. He has to hold down the “job” at Chicken Shack because “LaKeisha” needs another “weave” so she looks “ghetto fabulous” while classily sipping that “forty”. Mmm hmmmm!

By: guest

guest — Mon, 17 Mar 2008 20:54:12 +0000

@2:33pm. I realize that there were plenty of reforms in the New Deal after the bank insolvencies. Didn’t most of the runs in the Depression happen to retail banks? Bear Stearns is an investment bank. I don’t think the FDIC applies to it, I don’t know what would difference Glass Steagle make in this context, and tightened margin requirements, while a good thing, don’t necessarily prevent a bank run. I was bringing up the historical bank runs to illustrate how devastatingly fast a bank run can happen, how hard it is to protect a bank once it does happen, and how ruinous a run can be.
“Bank run” was used in the same sense any catastrophe would be, such as “flood” or “hurricane.” Obviously, there are steps you can take to control losses from floods and hurricanes, but they still can occur and are devastating when they do. Same thing with a bank run.
This period of time has shattered two myths: housing prices don’t fall, and bank runs can’t happen anymore.
Maybe there’s an underlying class action for what happened with Bear Stearns, but I’m skeptical that shareholders can recover for the effects of a panic.

By: guest

guest — Mon, 17 Mar 2008 20:16:12 +0000

@2:25 I happened to be at a Chase bank branch this weekend and it was PACKED. I’m not saying that a run on banks is occurring, but I’ll just say I wouldn’t be too optimistic on bank stocks. Add this:
http://www.youtube.com/watch?v=CnnOOo6tRs8
and a Hoover-esque El Presidente and it’s 1929 all over again! All we need now is WWIII to get us out! Pakistan, Russia, China and Iran – ya listening? Bring it on!

By: BSD

BSD — Mon, 17 Mar 2008 19:35:31 +0000

How about Cramer, still-battered from the Spitzer fallout, recommending that nobody get out of Bear? http://www.businessandmedia.org/articles/2008/20080317110946.aspx

By: guest

guest — Mon, 17 Mar 2008 19:33:06 +0000

A: because the second part of the lesson was the SEC act, FDIC insurance, Glass Steagle, tightened margin requirements, etc., leading most to conclude that it such occurances were a thing of the past.

By: guest

guest — Mon, 17 Mar 2008 19:31:48 +0000

Poor Carney. You know, a pyramid scheme is also a trust based business. It will keep chugging, people will keep making money, until confidence in the magic of the pyramid for creating wealth is lost.
As ever, the Carney is uniquely deprived of insight. The question is not whether businesses require the confidence of stakeholders to function, but whether a given business model can sustain confidence. Debt fueled profits work fantastically until the negative cash flows outstrip the new financing on tap. the timing of that moment varies, its occurance never does. It is this way in which Bear Stearns echoes Enron and in which they both echo confidence schemes as old as the hills.
-one synapse clapping

By: guest

guest — Mon, 17 Mar 2008 19:25:03 +0000

I don’t know why it is so hard for people to understand that a bank can be sufficiently capitalized for normal operations but could not withstand a run on the bank. A bad enough run can destroy a bank in a single afternoon. Unless there’s more underlying problems, there’s no class action for damage caused by a run. It’s part of the risk one assumes when one buys a bank stock.
Q. Weren’t people paying attention in American history when they taught about Franklin Roosevelt, bank runs, and bank holidays?

By: guest

guest — Mon, 17 Mar 2008 19:05:31 +0000

Hey 1:59 -
How about Schwartz publicly announcing that the firm was A-OK a few days ago? If there isn’t a lawsuit in that then the plaintiff’s bar and the SEC might as well pack it up, too.

By: guest

guest — Mon, 17 Mar 2008 19:03:51 +0000

“Trust” is based on management’s ability to meet its fiduciary duties.

By: guest

guest — Mon, 17 Mar 2008 18:59:24 +0000

I’m curious as to what wrongs you are seeking to be compensated for through a class action suit.

By: guest

guest — Mon, 17 Mar 2008 18:51:48 +0000

Yes, when is the class action suit starting. Sign me up.