Bear Stearns, Proof Of The Saw Politicians Can Make Everyone Poor
Read more articles on Finance and Life and Politics.May 5, 2008
Posted by neillevine
May 5, 2008
Posted by neillevine
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Bear Stearns is proof of the adage that politicians can make everyone poor.
For more than eighty years, Bear Stearns was a reputable Wall Street financial services firm, diversifying its range of services as time passed along with the rest of the industry.
In the past year, it has been the victim of great financial turmoil and its stock, ticker symbol BSC, has fallen from over one hundred fifty dollars per share to, at one point, two dollars per share based on a takeover offer from J.P. Morgan Chase, that was squired by the Federal Reserve, no less. The stock is now selling around ten dollars a share, as a result of an improved offer, still a huge discount from the thirty dollars a share it was selling at just days before.
What happened?
Well, back in the good old days, you remember them, before the internet, interest rates were pretty much fixed, stable and predictable. But the Federal Reserve in recent times began adjusting interest rates and when interest rates went up it cost banks and other financial institutions money big time, leading to serious complaints. Finance companies were then allowed to offer adjustable rate loans and the like and interest rates charged were allowed to rise beyond eighteen per cent, particularly for credit cards and the like.
An adjustable rate loan as opposed to a fixed rate meant that consumers could be charged more and more as the Federal Reserve tightened credit.
Then came the legal requirement that people could not be denied credit, despite problems in the past. There was also the Community Redevelopment Act, another requirement that prevented banks from sticking to people who were more likely to repay their debts and be good customers.
So the sub-prime loan was born where financial institutions charged comparatively high rates and fees to make up for the risk of non-payment.
Bear Stearns got involved in selling collateralized debt obligations, bundles of mortgages and the like that were based on adjustable rates and sub-prime risks.
When the Federal Reserve was raising interest rates more and more people found they could not afford to pay. Bear Stearns got stuck with losses as the problem snow balled. Not only was the company faced with negative finances, but business was drying up, translating into paying employees with little work to do. So stock brokers, analysts, secretaries and messengers become people who face the loss of their jobs.
Worse, many Bear Stearns workers, who had their savings tied up in the company’s stock, faced large losses as their equity fell from over one hundred dollars to the current ten dollars. It was reported that employees owned over thirty percent of the company and a drop in the price of shares as described here is a big loss for anyone, including former millionaires.
To prevent this type of problem in the future, the Congress may make it illegal to offer people loans with interest rate payments that balloon beyond their income.
Of course, this is little comfort to the victims at Bear Stearns. But that is how today’s retail politics are played.
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