Over at the magazine n+1 were a couple of interviews with a hedge fund manager before and after the financial meltdown occurred. Both interviews were compelling, and worth reading.
One part that really stuck with me was an analysis of how the Bear Stearns takeover by JPMorgan occurred. I think the key parts are the ones I put in italics:
‘Well, the government had their role. The difference between what happened and a normal takeover is the Fed, because the Fed is providing JPMorgan some non-recourse financing for Bear Stearns assets. The strange thing about the deal is that Morgan is paying so little for Bear Stearns. Bear Stearns was trading at 170 dollars a share not that long ago, now the deal was 2 dollars a share. A lot of wealth was wiped out. The question is, why would anyone accept it? Just before you came in today, JPMorgan increased their offer to 10 dollars. But a 2-dollar share offer, for the most part it’s like, “This is like pennies to me. I’ll say no to this deal and maybe I’ll do better in bankruptcy.” The reason the Fed didn’t want Bear to go through bankruptcy is that there are all kinds of interconnections between Bear and other banks. There’s counterparty risk, it could lead to panic, it could lead to a whole mess in the financial market, so the Fed just wants the problem to go away, the Treasury just wants the problem to go away. But if I am a shareholder it’s not my problem. “Let’s go bankrupt, let’s see, maybe we can do better than 2 dollars!” So everyone here was puzzled that Bear would agree to that kind of a deal.
Now Bear Stearns is unusual in that a lot of the shares are owned by insiders in the company, and the theory we had at the desk here is that the Treasury Department—not the Fed, the Fed’s not so tough, but the Treasury Department went to the top guys at Bear and said: “Either a deal gets done that saves Bear and calms the financial system by the end of this weekend, or we will find some reason to put you in jail.” And I think one of the things that every officer of a public company is very sensitive to, post-Enron, is jail. There has been a criminalization of failure. And after Sarbanes-Oxley, and in the wake of prosecutions related to business failures, it was like Beria said: You show me the man, I’ll find the crime.’
First off, I don’t think the Beria analogy is a good one. If anything, I think it is more the case that any prosecutor worth their salt could go in a find all kinds of things. But I agree with the rest of it.
the question I have is: why isn’t the Treasury department getting tougher with AIG? Because they can throw people in jail. The current approach isn’t working.