Wednesday, March 19, 2008

Bear Stearns

This was a response to some (rare) economic blathering on Redskins Insider...
The key point is that there is a considerable spread between the risk that a typical investor is willing to take and the risk profile of these highly-leveraged, wildly overvalued mortgage-backed CDOs. So they're not worth the book value that a company like Bear Stearns has them listed at, and no one is attracted to them even at a discount price.
My analogy would be a car dealer that has a bright yellow AMC Pacer on the lot. It's not worth the $10,000 MSRP, and no one will buy it for $5,000, $6,000, or whatever less! Meanwhile, he's paying interest on the car, it's falling apart before his eyes (that's why it's a Pacer), and pretty soon the dealer starts thinking about giving it away just to stop the bleeding.
The government "rescue" of JP Morgan is equivalent to Chrysler taking over AMC [not that that would ever happen!], and the government stepping in as part of the transaction and providing a class-action lawsuit protection on all Pacers. In a reasonable world, the government will not have to lay out anything; if the market collapses, JP Morgan (Chrysler in the analogy) at least doesn't have to worry about a class action lawsuit.

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