What does this mean?
Among other things, it means tha all that jawboning from Treasury Secretary Hank Paulson last week about how the government wasn’t bailing out Bear Stearns was a bunch of hooey. The Fed and the Treasury Department gave Bear and JP Morgan shareholders a $30 billion gift from taxpayers. And the moment Bear Stearns realised that all the crap on its balance sheet had been transformed into a Treasury Bill, it, sensibly, demanded more for itself.
And why shouldn’t it have? When the Fed suddenly guaranteed Bear Stearns with the full faith and credit of the US government, it became worth more. Specifically, it went from being worth zero to at least $10 a share.
And now US homeowners, justifiably, will scream that the government cares more about Wall Street fat cats than it does about the Little Guy. And the Fed and Treasury will have to start scrambling to put together a plan to buy everyone’s house. Welcome to Bailout Nation.
“You didn’t expect me to let my friends at Bear Stearns lose their shirts, did you? They’re my FRIENDS, for goodness sake.”