Daily Archives: March 17, 2008

On Friday Bear Stearns–even in the throes of a financial collapse that had driven its share price down by three-quarters–was still worth $3.5 billion. On Sunday night it was worth barely $200m, sold for two bucks a share to J.P. Morgan, in a deal brokered by the Fed. If this is a bail-out (and it is) the shareholders of Bear Stearns are not exactly thrilled about it. They will want to know why giving away their firm (whose book value, they had just been told, was in the neighbourhood of $80 a share, and whose headquarters building is said to be worth $1 billion) to J.P. Morgan was better for them than going bust.

It wasn’t. Bankruptcy would surely have recovered more value for shareholders than this give-away–but the Fed evidently feared that closure and disposal of Bear’s assets would have jeopardised other parts of the country’s teetering financial system. Preventing that was the Fed’s overriding goal. The firm had to be acquired in a hurry, shored up, and then run, so far as counterparties were concerned, as though nothing had happened. By any measure, Bear Stearns was not that big: it was surely not “too big to fail”. Apparently, though, it was deemed too delicately interconnected to fail. One wonders how many such institutions there now are, and who will carry the burden of keeping them in business.

The Fed, helping to answer that question, simultaneously announced a new lending facility for “primary dealers”–non-bank financial firms like Bear, which have hitherto been unable to borrow from the Fed. This constitutes a remarkable expansion of the Fed’s financial safety net. Something else Bear’s shareholders will want to know is why this facility was not created in time for them to take advantage of it. At the end of last week, they were having to borrow from the Fed indirectly, through the good offices of J.P. Morgan. Two days later, J.P. Morgan is getting Bear for nothing, and in addition has been promised as much as $30 billion in Fed loans, secured against Bear’s dodgy assets. If the assets turn out to be worth less than the loans, the Fed–ie, the taxpayer–bears the risk. (And that, by the way, is why these arrangements are indeed a bail-out, though not one that helps Bear’s original owners.)

On the face of it, this looks like a remarkably good deal for J.P. Morgan. We will see whether it turns out to be such good value for taxpayers.

The contest for the Democratic nomination has entered a period of suspended reality. The next big vote, in Pennsylvania, is five weeks away – and is unlikely to affect the race much in any case. This agonising, drawn-out sequence of primaries is not in the end going to choose the nominee. When it is over, Barack Obama will lead in elected delegates, but not by enough to settle the thing. The Democratic party’s unelected “superdelegates” will do that, quite possibly not before the party’s convention in August.

The Clinton campaign is already concentrating on making its best case to the superdelegates. For the moment, this means arguing that Hillary Clinton will be the stronger candidate against John McCain in November. Mr Obama and Mrs Clinton are both tied with Mr McCain in national polls – though these do not yet show the fall-out, if any, from the recent surge of interest in the racist demagoguery of Mr Obama’s spiritual mentor, Jeremiah Wright. Also, Mrs Clinton can argue that she has the edge in the swing states that the Democrats have to win.

Later, if she manages to eke out a lead in votes cast, she will bolster that argument with an impassioned line about the superdelegates’ duty to uphold the will of the people. (This is possible especially if the Florida and Michigan contests are rerun.) Of course, should Mr Obama hang on to his popular-vote lead (currently about 700,000), the will of the people will be his line and the Clinton team will challenge the legitimacy of the party’s electoral process.

The remainder of this column can be read here. Please post comments below.

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

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