You have no idea how Asia and other countries is going to rub the US's nose in it for all their previous remarks about Asian 'crony capitalism', corporate governence etc.You will never hear the last of this from Asia - they are still smarting over the US high handedness and assumed perfection of their system.
http://www.nationmultimedia.com/2008/03/18/business/business_30068477.php
US no longer champion of capitalism
Thanong Khanthong says the Bear Stearns bail-out is clearly a case of 'do as we say, not as we do'Published on March 18, 2008
Remember what the US - or the International Monetary Fund - preached to Thailand and the rest of Asia during the 1997 financial crisis? They told us not to commit the "moral hazard" of bailing out the banks. No banks were too big to fail, they said.
They advised us to close down weak financial institutions and open up the financial markets for foreign banks to buy out troubled Thai finance companies and banks. Let the markets take care of the problems, they said, suggesting we raise interest rates to defend the currency. They blamed the Thai crisis on crony capitalism and an absence of good governance.
Strangely enough, the US is now doing precisely what it told others not to do, in observing the textbooks of capitalist economics. The collapse of Bear Stearns, the fifth-largest investment banking house in the US, illustrates how the authorities there have swallowed their own words in handling a crisis involving a financial institution.
Both the US Treasury and the Federal Reserve have been working closely on the Bear Stearns bailout since last week, in order to prevent a systemic meltdown of US financial markets. They brought in JP Morgan to buy out Bear Stearns, which had been facing financial run. Its creditors no longer wanted to lend money to Bear Stearns. Moreover, they were demanding repayment of outstanding loans. Bear Stearns has huge exposure to mortgage-backed securities, which have turned sour following widespread defaults in the US housing market.
JP Morgan agreed to buy Bear Stearns for US$236.2 million (Bt7.43 billion), or $2 a share. The deal fixed the value of Bear Stearns at roughly 1 per cent of what the Wall Street firm was worth only 16 days earlier.
Coordinating the bailout, the Fed agreed to make JP Morgan's takeover risk-free by guaranteeing Bear Stearns's troubled mortgages and other assets worth about $30 billion. Without this incentive, JP Morgan would not have risked its capital to acquire Bear Stearns. It was a move unprecedented since the Great Depression that began in 1929.
The Fed also cut its emergency lending rate to financial institutions from 3.5 per cent to 3.25 per cent, effective immediately, in a move to ease credit and liquidity in financial markets further.
Today, the Fed is expected to take an even more drastic measure by cutting the Fed Funds rate another percentage point.
It has also created a special lending facility through which big investment banks can obtain short-term loans from the Fed by pledging mortgage securities and other assets as collateral.
So where are the lessons in hazardous morality? Where are the champions of market forces?
It appears the US authorities were afraid of a vicious cycle. If the run on Bear Stearns had been allowed to continue, it could have dragged down all other Wall Street firms whose financial positions were under scrutiny. If these financial institutions had failed, their collapse could have destroyed the credit market and brought the US financial system to a grinding halt.
Driven into a corner, the US authorities were forced to swallow their own words in order to save the US economy. The US can no longer claim to be the champion of global capitalism.
The Nation
