When the British government moved last month to take over crippled mortgage lender Northern Rock PLC, the conservative New York Sun was quick to sound the red alarm. Scandalized that private assets were being seized by a government, the Sun warned that “New Labor is going to start to look an awful lot like Old Labor did. Chalk one up for New York.”
Today, New York’s capital markets are not looking very formidable in the wake of the collapse of Bear Stearns, but conservatives can presumably take solace in the fact that Bear is now in the hands of J.P. Morgan Chase rather than some Washington bureaucrats. Rather than doing anything so retro as a takeover, the Federal Reserve held a one-buyer fire sale over the weekend that allowed Morgan to pay only $2 apiece for shares that were worth more than ten times as much on Friday. Even if you assume that most of that value would have vaporized as Bear went into freefall, Morgan still made out like a bandit with its purchase price of about $240 million. The Wall Street Journal is reporting that Bear’s headquarters building alone is worth up to $1.4 billion. Not surprisingly, Bear’s shareholders are up in arms.
What’s more remarkable about the Fed’s intervention is that it, not Morgan, took responsibility for financing Bear’s most precarious assets—to the tune of up to $30 billion. The way things are going, the Fed is going to have to take that loss. In doing so, it would effectively be nationalizing Bear’s bad investments. Such is the new lemon socialism for the financial sector: the federal government takes over worthless assets while allowing a private party to grab what’s valuable. That same upstanding private party, by the way, paid a total of more than $4 billion in 2005 to settle lawsuits relating to its involvement in the Enron and WorldCom scandals.
The Fed may soon find itself arranging more shotgun marriages. The shares of other major brokerages and investment banks have been gyrating as the market, in the words of the Financial Times, “waits for the next domino to fall.”