The bailout of Bear Stearns was, in effect, a bailout of JPMorgan Chase.
Chase wrote the most credit default swaps of anyone. They also had by far the largest number of open but uncleared swaps (i.e., JPMC sells one side of the swap to a counterparty, but cannot spin off its own side — overwhelmingly, the “BSC will not default” side of the default-swap bet — because no market participants *wanted* credit default swaps). In other words they were a huge risk for JPMC.
Of course, (I think) nobody knows the exact distribution of swaps JPMC had regarding Bear Stearns. However, it’s almost certain that a preponderance of the credit default swaps were Bear Stearns swaps, considering how few people there were who would bet that Bear wouldn’t default.
And everyone on the other side of JPMC’s open, uncleared BSC credit default swaps was defrauded. They paid for default protection, and the unprecedented, extralegal, Fed-brokered absorption of BSC by JPMC defrauded all of those people.
Indirectly, everyone who purchased financial default swaps has been defrauded, because the Fed now accepts garbage for whatever you say its value is — as long as you’re one of the “sweet 16” broker dealers. None of the banks will ever go bankrupt, which means that all the private sector actors who saw BSC coming were defrauded, while JPM, the primary market maker of credit default swaps which greased the wheels with merry abandon, gets bailed out.
And the Fed’s “bailout,” in the form of exchanging AAA Treasuries for “AAA” (garbage) mortgage-backed securities, is a tax on everybody who was stupid enough to trust the “full faith and credit of the United States Treasury.”
The credit default swap market — the venue for private buying and selling of insurance against default — has been inflated out of existence, because its largest (financials) segment has been rendered too big to fail by a moronic/compliant Fed. What is all that default protection worth now? Nothing.
This dose of regulatory fascism (the invalidation of a tens of trillions of dollar market), has, by the way, been brought to you by the Republicans.
It’s always good to put the Greenspan – Rubin – Bernanke free-base, free-lunch, free market brand of capitalism in perspective: it’s a fraud.
Let’s just say that if Paulson or Bernanke or Jamie Dimon happened to be black, and walking out of a bank, he’d be shot dead on sight or handed 25 years in the slammer, for robbery (as well as aggravated assault with an assault weapon, etc).
(TOH to “mystery” for that lesson …)
Oh, by the way, this isn’t the first type of “screw the intelligent bears” move Bernanke has pulled. Remember the bogus “discount rate” cut that Bernanke announced half an hour before close of business last Friday? All those options purchased by all the intelligently bearish people were rendered worthless.