On March 19, JP Morgan Chase CEO Jamie Dimon joined Bear Stearns CEO Alan Schwartz to face a group of 400 stunned Bear executives. Five days earlier, Bear Stearns, one of Wall Street's five largest investment banks, had lost $17 billion of wealth, triggering the biggest financial panic since the Great Depression.
Bear approached complete collapse before the US Federal Reserve stepped in to rescue it by engineering the emergency funding that allowed commercial giant JP Morgan to it take — the first time the Fed has engineered such a rescue since the 1930s.
It is impossible to feel sympathy for the situation now facing Bear's high-flying management team. Current non-executive chairman and billionaire Jimmy Cayne, for example, will walk away with more than US$16 million, while JP Morgan has already reportedly made lucrative offers to hire top Bear bankers and brokers.
Bear's 14,000 employees, in contrast, have fared poorly. They own an estimated one-third of its total shares. As Bear sheds half of its work force, many will face financial ruin. The cost to workers whose pension funds have been invested in Bear Stearns is unknown.
Growing financial crisis
The Bear Stearns debacle is just the latest phase of the financial distress triggered by the sub-prime mortgage crisis last July, and it is unlikely to be the last. Former Bear board member Stephen Raphael summarised the cause of the crisis, telling the Wall Street Journal, "Wall Street is really predicated on greed".
The current financial panic is based on the knowledge that since the 1990s, Wall Street investment firms have orchestrated get-rich-quick schemes predicated on a model of betting, using the odds of Russian Roulette, in which managers offer investors opportunities to make fast money in high-risk transactions.
These investment schemes, which operate free of government regulation, have been described as a "shadow banking system", operating in virtual secrecy, accountable to no one, based on mathematical models investors could not possibly understand and leveraged by borrowed money many times greater than the actual money invested — at terms always skewed in favour of short-term gains for managers.
As Financial Times columnist Martin Wolf noted, "With the 'right' fee structure, mediocre investment managers may become rich as they ensure that their investors cease to remain so".
On March 13, the Carlyle Capital Corporation hedge fund collapsed with debts amounting to 32 times its capital.
As the recent string of Wall Street crises exposed, the shadow banking system has increasingly intersected with commercial banks. It is difficult to know where one ends and the other begins, since banks have been allowed to keep such investment vehicles off their balance sheets — legally.
As the March 23 New York Times reported, "[D]erivatives are buried in the accounts of just about every Wall Street firm, as well as major commercial banks like Citigroup and JPMorgan Chase."
In recent years, mortgages have been carved up and bundled into investments that changed hands before the ink was dry, as investment banks and other vehicles bundled the debt and passed on risks to the entire international banking system.
Taxpayer-funded bailouts
Using up to $30 billion of taxpayer money — and without congressional approval — the Federal Reserve instantly mustered a bailout plan for Bear Stearns. But no relief is in sight for the more than 20 million homeowners whose mortgages are expected to exceed the value of their houses by the end of the year — roughly one-quarter of US homes, according to economist Paul Krugman — or the more than 2 million facing foreclosure within the next two years.
Thus far, the administration of President George Bush has responded with a "tough love" approach toward delinquent homeowners lured into obtaining mortgages by predatory lenders during the heyday of the housing boom.
Even the Wall Street Journal observed this glaring discrepancy, commenting: "Why a 'bailout' for Wall Street, and none for homeowners? Treasury Secretary Paulson [stated]: '... our top priority is the stability of our financial system ...'"
Those expecting a Democratic Party victory in November to reverse Wall Street forces must reconsider. The Los Angeles Times noted: "Hillary Rodham Clinton and Barack Obama, who are running for president as economic populists, are benefiting handsomely from Wall Street donations, easily surpassing Republican John McCain in campaign contributions from the troubled financial services sector."
By the end of 2007, 36% of the US population's disposable income went on food, energy and medical care, more than at any time since 1960, when records began. And that doesn't count housing costs.
[Abridged from the March 28 US Socialist Worker,