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Credit Crunch? What About the "Trust" Crunch?
Corporations, media and government have credibility issues
The major stock indexes came to a mixed close on Monday (March 17).
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Every new revelation in the subprime debacle has turned out to be far worse than initially reported. That much is obvious to anyone who has followed the thing closely. But that's not to say that what happened with Bear Stearns over the past week fits the "worse than it looks" pattern. No indeed. In fact, the disintegration of Bear Stearns has moved the subprime debacle from "worse than it looks" to the level of "we cannot trust anything that the corporations, media, and government are saying about the crisis."
Yes, that may seem like an extreme remark. But read these comments. Then let's consider if my conclusion seems "extreme."
The corporation
"There is absolutely no truth to the rumors of liquidity problems that circulated in the market."
Public statement by Bear Stearns on March 10, 2008, as reported by The Wall Street Journal.
The media
Question from viewer to Jim Cramer, host of CNBC's "Mad Money":
"Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?"
Answer from Cramer on March 11, 2008:
"No! No! No! Bear Stearns is not in trouble. If anything, they're more likely to be taken over. Don't move your money from Bear."
The government
"U.S. Securities and Exchange Chairman Christopher Cox told reporters on Tuesday [March 11, 2008] that capital adequacy at the five largest U.S. investment banks was being closely watched. 'We are reviewing the adequacy of capital at the holding company level on a constant basis, daily in some cases,' Cox said. 'We have a good deal of comfort about the capital cushions at these firms at the moment,' he said, including Bear."
Reuters news, March 11, 2008.
Okay, so does my conclusion still seem "extreme"? The entire financial establishment went on the record regarding Bear Stearns, and unanimously declared "No Problem." Within one week the firm was so bankrupt that it was bought out for $2 per share. Others folks may have a different standard than mine about "credible" sources -- I've drawn my conclusion.
Mind you, I am not saying that the people and sources above were being knowingly dishonest. What I am saying is that, in practical terms, honesty is less relevant than credibility. For all I know, a lot of smart people really did believe that Bear Stearns' $33 billion securities portfolio was sufficient collateral to meet any liquidity demands. Problem is, if lenders won't accept your collateral, and buyers won't purchase your assets... well, your collateral and assets have no monetary value.
Now those assets -- the mortgages, mortgage-backed securities, etc., etc. -- have been nationalized. Here again, "nationalized" is a strong word. But to see what I mean, you need only read as much fine print as you can get your eyes on regarding the Federal Reserve's $30 billion pledge to J.P. Morgan Chase, which took over Bear Stearns' securities. According to The Wall Street Journal:
"Fed officials wouldn't describe the exact financing terms or assets involved. But if those assets decline in value, the Fed would bear any loss, not J.P. Morgan."
And if the Fed bears a loss, guess who gets handed the bill: That would be you (and me), Mr. & Mrs. Taxpayer. Welcome to the subprime debacle.
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