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Sunday, March 16, 2008

The Economy Watch...Disaster Unfolds Hour by Hour!

Chalmers Johnson argues that the Debt Crisis is Now the Greatest Threat to the American Republic,

and how it is tied to our insane military spending. Another analysis…Conclusion: We are on the Road to Depression.

Going Bankrupt: Why the Debt Crisis Is Now the Greatest Threat to the American.

The military adventurers of the Bush administration have much in common with the corporate leaders of the defunct energy company Enron. Both groups of men thought that they were the "smartest guys in the room," the title of Alex Gibney's prize-winning film on what went wrong at Enron. The neoconservatives in the White House and the Pentagon outsmarted themselves. They failed even to address the problem of how to finance their schemes of imperialist wars and global domination.

As a result, going into 2008, the United States finds itself in the anomalous position of being unable to pay for its own elevated living standards or its wasteful, overly large military establishment. Its government no longer even attempts to reduce the ruinous expenses of maintaining huge standing armies, replacing the equipment that seven years of wars have destroyed or worn out, or preparing for a war in outer space against unknown adversaries. Instead, the Bush administration puts off these costs for future generations to pay - or repudiate. This utter fiscal irresponsibility has been disguised through many manipulative financial schemes (such as causing poorer countries to lend us unprecedented sums of money), but the time of reckoning is fast approaching.

There are three broad aspects to our debt crisis. First, in the current fiscal year (2008) we are spending insane amounts of money on "defense" projects that bear no relationship to the national security of the United States. Simultaneously, we are keeping the income tax burdens on the richest segments of the American population at strikingly low levels.

Second, we continue to believe that we can compensate for the accelerating erosion of our manufacturing base and our loss of jobs to foreign countries through massive military expenditures - so-called "military Keynesianism," which I discuss in detail in my book Nemesis: The Last Days of the American Republic. By military Keynesianism, I mean the mistaken belief that public policies focused on frequent wars, huge expenditures on weapons and munitions, and large standing armies can indefinitely sustain a wealthy capitalist economy. The opposite is actually true.

Third, in our devotion to militarism (despite our limited resources), we are failing to invest in our social infrastructure and other requirements for the long-term health of our country. These are what economists call "opportunity costs," things not done because we spent our money on something else. Our public education system has deteriorated alarmingly. We have failed to provide health care to all our citizens and neglected our responsibilities as the world's number one polluter. Most important, we have lost our competitiveness as a manufacturer for civilian needs - an infinitely more efficient use of scarce resources than arms manufacturing. Let me discuss each of these.


It is virtually impossible to overstate the profligacy of what our government spends on the military. The Department of Defense's planned expenditures for fiscal year 2008 are larger than all other nations' military budgets combined. The supplementary budget to pay for the current wars in Iraq and Afghanistan, not part of the official defense budget, is itself larger than the combined military budgets of Russia and China.

Defense-related spending for fiscal 2008 will exceed $1 trillion for the first time in history. The United States has become the largest single salesman of arms and munitions to other nations on Earth. Leaving out of account President Bush's two on-going wars, defense spending has doubled since the mid-1990s. The defense budget for fiscal 2008 is the largest since World War II.

Before we try to break down and analyze this gargantuan sum, there is one important caveat. Figures on defense spending are notoriously unreliable. The numbers released by the Congressional Reference Service and the Congressional Budget Office do not agree with each other.

Robert Higgs, senior fellow for political economy at the Independent Institute, says: "A well-founded rule of thumb is to take the Pentagon's (always well publicized) basic budget total and double it."

Even a cursory reading of newspaper articles about the Department of Defense will turn up major differences in statistics about its expenses. Some 30-40% of the defense budget is "black," meaning that these sections contain hidden expenditures for classified projects. There is no possible way to know what they include or whether their total amounts are accurate.

There are many reasons for this budgetary sleight-of-hand - including a desire for secrecy on the part of the president, the secretary of defense, and the military-industrial complex - but the chief one is that members of Congress, who profit enormously from defense jobs and pork-barrel projects in their districts, have a political interest in supporting the Department of Defense. In 1996, in an attempt to bring accounting standards within the executive branch somewhat closer to those of the civilian economy, Congress passed the Federal Financial Management Improvement Act.

It required all federal agencies to hire outside auditors to review their books and release the results to the public. Neither the Department of Defense, nor the Department of Homeland Security has ever complied. Congress has complained, but not penalized either department for ignoring the law. The result is that all numbers released by the Pentagon should be regarded as suspect.

In discussing the fiscal 2008 defense budget, as released to the press on February 7, 2007, I have been guided by two experienced and reliable analysts: William D. Hartung of the New America Foundation's Arms and Security Initiative and Fred Kaplan, defense correspondent for They agree that the Department of Defense requested $481.4 billion for salaries, operations (except in Iraq and Afghanistan), and equipment. They also agree on a figure of $141.7 billion for the "supplemental" budget to fight the "global war on terrorism" - that is, the two on-going wars that the general public may think are actually covered by the basic Pentagon budget.

The Department of Defense also asked for an extra $93.4 billion to pay for hitherto unmentioned war costs in the remainder of 2007 and, most creatively, an additional "allowance" (a new term in defense budget documents) of $50 billion to be charged to fiscal year 2009. This comes to a total spending request by the Department of Defense of $766.5 billion.

But there is much more. In an attempt to disguise the true size of the American military empire, the government has long hidden major military-related expenditures in departments other than Defense.

For example, $23.4 billion for the Department of Energy goes toward developing and maintaining nuclear warheads; and $25.3 billion in the Department of State budget is spent on foreign military assistance (primarily for Israel, Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, the United Arab Republic, Egypt, and Pakistan).

Another $1.03 billion outside the official Department of Defense budget is now needed for recruitment and reenlistment incentives for the overstretched U.S. military itself, up from a mere $174 million in 2003, the year the war in Iraq began.

The Department of Veterans Affairs currently gets at least $75.7 billion, 50% of which goes for the long-term care of the grievously injured among the at least 28,870 soldiers so far wounded in Iraq and another 1,708 in Afghanistan.

The amount is universally derided as inadequate. Another $46.4 billion goes to the Department of Homeland Security.

Missing as well from this compilation is $1.9 billion to the Department of Justice for the paramilitary activities of the FBI; $38.5 billion to the Department of the Treasury for the Military Retirement Fund; $7.6 billion for the military-related activities of the National Aeronautics and Space Administration; and well over $200 billion in interest for past debt-financed defense outlays. This brings U.S. spending for its military establishment during the current fiscal year (2008), conservatively calculated, to at least $1.1 trillion.


Such expenditures are not only morally obscene, they are fiscally unsustainable.

Many neoconservatives and poorly informed patriotic Americans believe that, even though our defense budget is huge, we can afford it because we are the richest country on Earth. Unfortunately, that statement is no longer true. The world's richest political entity, according to the CIA's "World Factbook," is the European Union. The EU's 2006 GDP (gross domestic product - all goods and services produced domestically) was estimated to be slightly larger than that of the U.S. However, China's 2006 GDP was only slightly smaller than that of the U.S., and Japan was the world's fourth richest nation.

A more telling comparison that reveals just how much worse we're doing can be found among the "current accounts" of various nations. The current account measures the net trade surplus or deficit of a country plus cross-border payments of interest, royalties, dividends, capital gains, foreign aid, and other income.

For example, in order for Japan to manufacture anything, it must import all required raw materials. Even after this incredible expense is met, it still has an $88 billion per year trade surplus with the United States and enjoys the world's second highest current account balance. (China is number one.)

The United States, by contrast, is number 163 - dead last on the list, worse than countries like Australia and the United Kingdom that also have large trade deficits. Its 2006 current account deficit was $811.5 billion; second worst was Spain at $106.4 billion. This is what is unsustainable.

It's not just that our tastes for foreign goods, including imported oil, vastly exceed our ability to pay for them. We are financing them through massive borrowing.

On November 7, 2007, the U.S. Treasury announced that the national debt had breached $9 trillion for the first time ever. (Boy was that a helluva Birthday present for me!)

This was just five weeks after Congress raised the so-called debt ceiling to $9.815 trillion. If you begin in 1789, at the moment the Constitution became the supreme law of the land, the debt accumulated by the federal government did not top $1 trillion until 1981.

When George Bush became president in January 2001, it stood at approximately $5.7 trillion. Since then, it has increased by 45%. This huge debt can be largely explained by our defense expenditures in comparison with the rest of the world.

The world's top 10 military spenders and the approximate amounts each country currently budgets for its military establishment are:

1. United States (FY08 budget), $623 billion
2. China (2004), $65 billion
3. Russia, $50 billion
4. France (2005), $45 billion
5. Japan (2007), $41.75 billion
6. Germany (2003), $35.1 billion
7. Italy (2003), $28.2 billion
8. South Korea (2003), $21.1 billion
9. India (2005 est.), $19 billion
10. Saudi Arabia (2005 est.), $18 billion
World total military expenditures (2004 est.), $1,100 billion
World total (minus the United States), $500 billion

Our excessive military expenditures did not occur over just a few short years or simply because of the Bush administration's policies. They have been going on for a very long time in accordance with a superficially plausible ideology and have now become entrenched in our democratic political system where they are starting to wreak havoc. This ideology I call "military Keynesianism" - the determination to maintain a permanent war economy and to treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.

This ideology goes back to the first years of the Cold War. During the late 1940s, the U.S. was haunted by economic anxieties. The Great Depression of the 1930s had been overcome only by the war production boom of World War II. With peace and demobilization, there was a pervasive fear that the Depression would return. During 1949, alarmed by the Soviet Union's detonation of an atomic bomb, the looming communist victory in the Chinese civil war, a domestic recession, and the lowering of the Iron Curtain around the USSR's European satellites, the U.S. sought to draft basic strategy for the emerging cold war.

The result was the militaristic National Security Council Report 68 (NSC-68) drafted under the supervision of Paul Nitze, then head of the Policy Planning Staff in the State Department. Dated April 14, 1950 and signed by President Harry S. Truman on September 30, 1950, it laid out the basic public economic policies that the United States pursues to the present day.

In its conclusions, NSC-68 asserted: "One of the most significant lessons of our World War II experience was that the American economy, when it operates at a level approaching full efficiency, can provide enormous resources for purposes other than civilian consumption while simultaneously providing a high standard of living."

With this understanding, American strategists began to build up a massive munitions industry, both to counter the military might of the Soviet Union (which they consistently overstated) and also to maintain full employment as well as ward off a possible return of the Depression.

The result was that, under Pentagon leadership, entire new industries were created to manufacture large aircraft, nuclear-powered submarines, nuclear warheads, intercontinental ballistic missiles, and surveillance and communications satellites. This led to what President Eisenhower warned against in his farewell address of February 6, 1961: "The conjunction of an immense military establishment and a large arms industry is new in the American experience" - that is, the military-industrial complex.

By 1990, the value of the weapons, equipment, and factories devoted to the Department of Defense was 83% of the value of all plants and equipment in American manufacturing. From 1947 to 1990, the combined U.S. military budgets amounted to $8.7 trillion. Even though the Soviet Union no longer exists, U.S. reliance on military Keynesianism has, if anything, ratcheted up, thanks to the massive vested interests that have become entrenched around the military establishment.

Over time, a commitment to both guns and butter has proven an unstable configuration. Military industries crowd out the civilian economy and lead to severe economic weaknesses. Devotion to military Keynesianism is, in fact, a form of slow economic suicide.

On May 1, 2007, the Center for Economic and Policy Research of Washington, D.C., released a study prepared by the global forecasting company Global Insight on the long-term economic impact of increased military spending. Guided by economist Dean Baker, this research showed that, after an initial demand stimulus, by about the sixth year the effect of increased military spending turns negative. Needless to say, the U.S. economy has had to cope with growing defense spending for more than 60 years. He found that, after 10 years of higher defense spending, there would be 464,000 fewer jobs than in a baseline scenario that involved lower defense spending.


"It is often believed that wars and military spending increases are good for the economy. In fact, most economic models show that military spending diverts resources from productive uses, such as consumption and investment, and ultimately slows economic growth and reduces employment."

These are only some of the many deleterious effects of military Keynesianism.


It was believed that the U.S. could afford both a massive military establishment and a high standard of living, and that it needed both to maintain full employment. But it did not work out that way. By the 1960s, it was becoming apparent that turning over the nation's largest manufacturing enterprises to the Department of Defense and producing goods without any investment or consumption value was starting to crowd out civilian economic activities.

The historian Thomas E. Woods, Jr., observes that, during the 1950s and 1960s, between one-third and two-thirds of all American research talent was siphoned off into the military sector. It is, of course, impossible to know what innovations never appeared as a result of this diversion of resources and brainpower into the service of the military, but it was during the 1960s that we first began to notice Japan was outpacing us in the design and quality of a range of consumer goods, including household electronics and automobiles.

Nuclear weapons furnish a striking illustration of these anomalies. Between the 1940s and 1996, the United States spent at least $5.8 trillion on the development, testing, and construction of nuclear bombs. By 1967, the peak year of its nuclear stockpile, the United States possessed some 32,500 deliverable atomic and hydrogen bombs, none of which, thankfully, was ever used. They perfectly illustrate the Keynesian principle that the government can provide make-work jobs to keep people employed. Nuclear weapons were not just America's secret weapon, but also its secret economic weapon. As of 2006, we still had 9,960 of them.

There is today no sane use for them, while the trillions spent on them could have been used to solve the problems of social security and health care, quality education and access to higher education for all, not to speak of the retention of highly skilled jobs within the American economy.

The pioneer in analyzing what has been lost as a result of military Keynesianism was the late Seymour Melman (1917-2004), a professor of industrial engineering and operations research at Columbia University. His 1970 book, Pentagon Capitalism: The Political Economy of War, was a prescient analysis of the unintended consequences of the American preoccupation with its armed forces and their weaponry since the onset of the Cold War. Melman wrote (pp. 2-3):

"From 1946 to 1969, the United States government spent over $1,000 billion on the military, more than half of this under the Kennedy and Johnson administrations - the period during which the [Pentagon-dominated] state management was established as a formal institution. This sum of staggering size (try to visualize a billion of something) does not express the cost of the military establishment to the nation as a whole. The true cost is measured by what has been foregone, by the accumulated deterioration in many facets of life by the inability to alleviate human wretchedness of long duration."

In an important exegesis on Melman's relevance to the current American economic situation, Thomas Woods writes:

"According to the U.S. Department of Defense, during the four decades from 1947 through 1987 it used (in 1982 dollars) $7.62 trillion in capital resources. In 1985, the Department of Commerce estimated the value of the nation's plant and equipment, and infrastructure, at just over $7.29 trillion. In other words, the amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock."

The fact that we did not modernize or replace our capital assets is one of the main reasons why, by the turn of the twenty-first century, our manufacturing base had all but evaporated. Machine tools - an industry on which Melman was an authority - are a particularly important symptom. In November 1968, a five-year inventory disclosed (p. 186) "that 64 percent of the metalworking machine tools used in U.S. industry were ten years old or older.

The age of this industrial equipment (drills, lathes, etc.) marks the United States' machine tool stock as the oldest among all major industrial nations, and it marks the continuation of a deterioration process that began with the end the Second World War. This deterioration at the base of the industrial system certifies to the continuous debilitating and depleting effect that the military use of capital and research and development talent has had on American industry."

Nothing has been done in the period since 1968 to reverse these trends and it shows today in our massive imports of equipment - from medical machines like proton accelerators for radiological therapy (made primarily in Belgium, Germany, and Japan) to cars and trucks.

Our short tenure as the world's "lone superpower" has come to an end. As Harvard economics professor Benjamin Friedman has written:

"Again and again it has always been the world's leading lending country that has been the premier country in terms of political influence, diplomatic influence, and cultural influence. It's no accident that we took over the role from the British at the same time that we took over the job of being the world's leading lending country. Today we are no longer the world's leading lending country. In fact we are now the world's biggest debtor country, and we are continuing to wield influence on the basis of military prowess alone."

Some of the damage done can never be rectified. There are, however, some steps that this country urgently needs to take. These include reversing Bush's 2001 and 2003 tax cuts for the wealthy, beginning to liquidate our global empire of over 800 military bases, cutting from the defense budget all projects that bear no relationship to the national security of the United States, and ceasing to use the defense budget as a Keynesian jobs program. If we do these things we have a chance of squeaking by. If we don't, we face probable national insolvency and a long depression.

Chalmers Johnson is the author of Nemesis: The Last Days of the American Republic, just published in paperback. It is the final volume of his Blowback Trilogy, which also includes Blowback (2000) and The Sorrows of Empire (2004).

Bear Stearns Rescue Is `Finger in Dike,' Scholars Say (Update1)

By Elliot Blair Smith

March 16 (Bloomberg) -- With Bear Stearns Cos.' temporary rescue in place, the $200 billion subprime crisis joins the history of government bailouts to preserve jobs, homes and savings when economic disaster looms.

Ever since Treasury Secretary William Gibbs McAdoo shut the New York Stock Exchange for four months in 1914, to prevent foreign investors from cashing out and throwing the U.S. into financial chaos at the outset of World War I, American policy makers routinely have suspended their support for free markets when confronted by economic peril.

``I think the systemic risks dominate right now, which means you've got to put your finger in the dike,'' says William Silber, a finance professor at New York University's Stern School of Business. He is the author of ``When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy'' (Princeton University Press, 232 pages, $27.95).

Bailouts can buy time while policy makers try to defuse panic. Last week, the Federal Reserve Bank of New York provided financial support for Bear Stearns, the fifth-largest U.S. securities firm. It faced eroding investor confidence in the fallout from losses related to securities based on mortgages to the least creditworthy borrowers.

Bear Stearns executives were striving today to strike an agreement to sell the firm to JPMorgan Chase & Co. before financial markets open tomorrow, people with knowledge of the talks said.


JPMorgan and the Fed said last week they would back New York-based Bear Stearns with emergency funding for an initial period of up to 28 days in the largest U.S. bailout of a securities firm. The deal is part of an agreement that enables the investment bank to borrow from the New York Fed's discount window while all three seek permanent financing or alternatives.

Bear Stearns needed the support in response to ``a multitude of market rumors regarding our liquidity,'' said Chief Executive Officer Alan Schwartz.

Just over 100 years ago, John Pierpont Morgan himself, the namesake of what was then known as the House of Morgan, came to the rescue when panic selling in October 1907 convulsed the New York Stock Exchange and threatened several banks and trusts.

Morgan, 70 and semi-retired, obtained an emergency pledge of $25 million from the U.S. Treasury. He persuaded New York's leading bankers and trust executives to put up another $25 million, after locking them in his library all night, according to ``The House of Morgan: An American Banking Dynasty and The Rise of Modern Finance,'' by Ron Chernow (Atlantic Monthly Press, 812 pages, $45.95).


By the force of his personality, Morgan restored order to the market. His intervention also convinced Congress and President Theodore Roosevelt of the need for a central bank.

Booms and busts define economic cycles, forming a familiar pattern to historians while surprising investors, policy makers and financiers.

Congress authorized $250 million in loan guarantees to rescue Lockheed Aircraft Corp. in August 1971, over the objections of the late Democratic Senator William Proxmire of Wisconsin. By today's standard, the stakes were small: about $1 billion in potential losses and 60,000 jobs.

The costs have risen steadily since, from the $1.2 billion in loan guarantees Congress provided Chrysler Corp. in 1979 to the $116.5 billion taxpayers spent to resolve the savings-and- loan industry's collapse by 1995.


The New York Fed averted a subsequent threat in September 1998 by persuading 14 banks to lend $3.65 billion to help unwind the leveraged trades of the Greenwich, Connecticut, hedge fund Long Term Capital Management. That was roughly equivalent to the $3.6 billion that the New York Fed loaned Chicago-based Continental Illinois National Bank & Trust Co. in 1984, in the largest rescue in U.S. banking history.

Yet the Treasury's shutdown of the New York Stock Exchange in 1914, a year after Morgan's death, remains one of the bluntest interventions by U.S. officials to head off a crisis. It is also one of the largest departures in American history from the capitalist creed of letting free markets sort out problems.

European investors held much of New York City's public debt. As foreigners cashed out, converting their securities to gold, the Treasury realized that its ability to maintain the dollar's link to bullion was being undermined, Silber wrote.

``Treasury Secretary McAdoo succeeded in August 1914 because he did not hesitate to bludgeon the crisis with a sledgehammer,'' Silber said in an interview March 14.


The decision served as a precedent for Franklin Delano Roosevelt, who closed the banks for a week on his first day as president in March 1933. When lenders reopened, Silber says, depositors who had stood in line to withdraw their money queued up to put it back in.

On both occasions, Silber says, government policy makers offered more-lasting solutions to ease market fears. In 1914, McAdoo moved to increase agricultural exports, bringing foreign capital into the country. In 1933, Roosevelt offered federal loan guarantees during the bank holiday to stimulate credit.

Founded in 1923, Bear Stearns has 14,153 employees at 34 offices in the U.S. and 14 abroad. It was providing trade execution and clearing services for $288.5 billion in client accounts as of Nov. 30, 2007. Last July, the failure of two of its hedge funds that invested in subprime-related securities initiated a broader selloff that continues.

Representative Ron Paul, a Texas Republican who ran for president this year, told the House Financial Services Committee in February that financial services bailouts would reward bad behavior. Paul doubts the Bear Stearns rescue will prop up the economy, he said March 14.

``It won't work,'' Paul said. ``It's like drug addiction. You feel withdrawal pains, but you save the patient.''

Fed Races to Rescue Bear Stearns In Bid to Steady Financial System

Storied Firm Sees
Stock Plunge 47%;
J.P. Morgan Steps In

March 15, 2008; Page A1

Credit turmoil spread to the heart of the U.S. financial system as Bear Stearns Cos., an 85-year-old institution that has survived the Depression and World War II, sought and received emergency funding backed by the federal government.

In an extraordinary move, the Federal Reserve and J.P. Morgan Chase & Co. stepped in to keep Bear afloat following a severe cash crunch.

The maneuver signaled that the Fed was trying to move aggressively to prevent Bear's crisis from spreading to the broader economy. But it seemed to do little to soothe fears. Bear's shares fell 47% to a nine-year low of $30 in New York Stock Exchange composite trading at 4 p.m. The Bear crisis, coming on the heels of this week's implosion of a publicly held affiliate of Carlyle Group, further rattled Wall Street. The Dow Jones Industrial Average fell nearly 195 points.

The lifeline gives Bear access to cash for an initial period of 28 days. J.P. Morgan will borrow the money from the Fed and relend it to Bear. Exact terms weren't disclosed, but the amount is limited only by how much collateral Bear can provide, Fed officials said.

The Fed, not J.P. Morgan, is bearing the risk of the loan. It is the first time since the Great Depression that the Fed has lent in this fashion to any entity other than a bank.

Some Wall Street executives said they thought Bear was likely to be sold, in whole or piecemeal, in a matter of days, to prevent it from going under. Bear, the fifth-largest investment bank, said it has retained investment bank Lazard to weigh alternatives. Those alternatives "can run the gamut," Bear Chief Executive Alan Schwartz said in a conference call.

Possible buyers, according to a person close to Bear, include J.P. Morgan and hedge fund Citadel Investment Group, which recently bought a big stake in online brokerage firm E*Trade Financial Corp. Private-equity firms also are expected to take a look at Bear, possibly including J.C. Flowers & Co.

Yesterday's developments were the latest in a series of blows to the financial system that began in August. Then, banks became so wary of lending to each other that money markets seized up and the world's central banks had to intervene. The trigger was a surge in delinquencies on U.S. subprime mortgages and the end to a spectacular rise in home prices.

But the turmoil has spread since to almost every corner of the credit markets. "The realization that mortgages might not be paid off led lenders to realize that other loans might not be paid off," said Douglas Elmendorft, a former Fed economist .

The pervasiveness of the financial problems and the risks to the economy became increasingly apparent at the beginning of the year. That led the Fed to cut short-term rates by 1.25 percentage points in 10 days, and the Bush White House and Democratic Congress -- usually unable to agree on anything -- to approve a large fiscal stimulus.

Video: Can Bear Stearns be stabilized?

Statements: Bear Stearns, J.P. Morgan, Fed, SEC

Deal Journal: Four Things to Watch

MarketBeat: Yes, Bear Stearns Is Having Liquidity Issues

Investors Turn Nervous Eye to Liquidity

Wall Street Ponders Extent Of Bear Stearns' Woes

Fed's Bear Stearns Rescue Is Rarity for Wall Street

In Dealing With Bear Stearns, Wall Street Plays Guardedly

Can New CEO Repair Bear?

Bear CEO's Handling of Crisis Raises Issues

How Bear Stearns Mess Cost Executive His Job

After initial relief, credit markets have taken a turn for the worse in recent weeks, breeding an every-man-for-himself attitude among Wall Street firms. With each firm intricately intertwined with others in a maze of loans, credit lines, derivatives and swaps, the Fed and Treasury agreed that letting Bear Stearns collapse quickly was a risk not worth taking, because the consequences were simply unknowable.

Morale among Bear's 14,000 employees, already flagging from days of speculation the firm was in trouble, sank Friday morning. As they learned of the emergency funding, some called their spouses, warning they could soon be out of a job, one employee said. Employees have been barred from trading the shares because of longstanding "lockups" weeks prior to the company's earnings announcements.

Shortly after 10:30 a.m., a recorded video message from CEO Mr. Schwartz was broadcast to employees. Hundreds gathered in the mortgage-securities trading area on the seventh floor of the firm's Madison Avenue headquarters in New York. Mr. Schwartz, CEO for only two months, said he was disappointed but employees should try not to lose heart.

Alan "Ace" Greenberg, the 80-year-old chairman of Bear's executive committee -- and the man credited with building the firm into a power during the 1980s and early 1990s -- tried to keep up appearances. A few minutes after noon, he left his trading-floor office and went upstairs to the 12th floor for his usual lunch in Bear's dining room. Asked early in the afternoon how his spirits were, he said, "I feel fine." He declined to answer further questions.

Bear's situation echoed in some ways that at British mortgage lender Northern Rock PLC, which in September became the target of the U.K.'s first bank run in more than a century, after the Bank of England stepped in with an emergency line of credit.

"At Northern Rock, it was depositors running. At Bear Stearns, it was counterparties" -- the parties a financial firm trades with -- said Tim Bond, a Barclays Capital strategist. In Northern Rock's case, the firm's problems only grew after it got a central-bank bailout, because of the effect on customers' confidence in the firm. Ultimately, the U.K. nationalized the lender.

Bear, although not one of the giants of Wall Street, long had a reputation as one of the most astute risk managers. It has a large mortgage business, but its mix of other businesses is less diverse than those of investment-banking rivals. That profile hurt Bear when the subprime-mortgage problems developed last spring. Two of Bear's mortgage-related hedge funds collapsed in July, costing investors more than $1 billion and worsening the credit crunch then developing.

Longtime CEO James Cayne, who was seen by some investors as too hands-off when the mortgage mess unfolded, stepped down in January, though he remained chairman. His successor, Mr. Schwartz, has been trying to rally Bear. But another downturn in the credit markets in the past couple of weeks fed nagging fears that Bear wasn't financially strong enough.

Word began to spread among fixed-income traders nine days ago that European banks had stopped trading with Bear. Some U.S. fixed-income and stock traders began doing the same on Monday, pulling their cash from Bear for fear it could get locked up if there was a bankruptcy.

That development put firms that still wanted to do business with Bear in a tough position: If Bear did fail, they would have to explain to their clients why they ignored the rumors. On Tuesday, a major asset-management company stopped trading with Bear.

On Thursday, an article in The Wall Street Journal reported that firms were growing cautious about their dealings with Bear. The exit by counterparties intensified. Bear executives spent most of this week fielding nervous calls and trying to put to rest rumors of banks being unwilling to trade with Bear and about Bear facing requests for more collateral on loans.

On Monday, Bear issued a statement in which Mr. Schwartz wrote that the firm's "balance sheet, liquidity and capital remain strong." On Wednesday, he ducked out of a Bear media conference in Palm Beach, Fla., for a CNBC interview in another effort to deflect speculation about Bear's situation.

But by Thursday afternoon, it was becoming clear within Bear that the firm couldn't withstand an accelerating retreat by worried customers -- in effect, a run on the bank. Securities firms that had been willing to accept collateral from Bear Stearns were insisting on cash instead. And the hedge funds that use Bear to borrow money and clear trades were withdrawing cash from their accounts. Around 4:30 p.m., Mr. Schwartz was convinced that Bear was facing a desperate situation.

He huddled with Chief Financial Officer Samuel Molinaro, Chief Risk Officer Michael Alix and Bear lawyers, debating what to do next, said people familiar with the discussions. The group convened a conference call with the board to discuss options. Mr. Cayne dialed in from Detroit, where he was playing in a bridge tournament, say people familiar with the matter.

Some time after 6 p.m., Mr. Schwartz called James Dimon, CEO of J.P. Morgan, the second-largest U.S. bank in stock-market value. J.P. Morgan's risk officers were familiar with Bear's collateral because J.P. Morgan was the clearing agent for its trades; thus, J.P. Morgan seemed to be in good position to lend Bear money, say people familiar with Mr. Schwartz's thinking.

Mr. Dimon sprang into action. He got on the phone with Steve Black, co-head of J.P. Morgan's investment bank, on vacation in the Caribbean. The group had a number of conversations with Fed representatives, concluding that something needed to be done for Bear, in part because a failure of the firm could have wide consequences.

By 7:30 p.m. Thursday, when it became clear Bear had not managed to secure necessary financing or a strategic deal, Fed officials began to realize they might have to step in.

The Fed each day lends money to its 20 "primary dealers," including Bear, through its money-market "repo" operations, which provide funding for one to 28 days to influence the level of interest rates. But those operations don't permit the Fed to advance much money to Bear by itself, and the loans must be secured by the highest-quality collateral, which is now in short supply.

The Fed can lend directly through its "discount window," but ordinarily only to commercial banks. A 1932 provision of the Federal Reserve Act allows the Fed to lend to non-banks if at least five of its seven governors approve. That provision was last regularly used during the Great Depression. It is meant to underscore that the central bank should lend to nonbanks only in extreme circumstances.

"I would be very cautious about opening that window up" to investment banks, Fed Vice Chairman Donald Kohn told Congress on March 4. Commercial banks get the access because they are subject to extensive federal supervision.

On a conference call at 7:30 p.m. Thursday, officials from the Securities and Exchange Commission and Bear disclosed to the Fed that Bear had lost far more of its liquidity that day than it had realized. A team of examiners from the Fed spent the night at Bear.

At about 5 a.m. Friday, regulators including New York Fed Chief Timothy Geithner, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and the Treasury under secretary domestic finance, Robert Steel, convened by conference call. At the end of the call at 7 a.m., the Fed had decided it would offer the loan. Mr. Paulson called and briefed President Bush, who was due to speak on the economy in New York. The Fed, with two governors' seats vacant and one governor overseas and unreachable, invoked a special legal clause to approve the loan with just four governors.

For Fed officials it was a difficult choice. They did not want to single Bear out for help and they realized their actions aggravated "moral hazard" -- the tendency of bailouts to encourage future risky behavior. But the alternative was potentially far worse. Bear risked defaulting on extensive "repo" loans, in which it pledges securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would see access to repo loans become more restrictive. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices.

By 7 a.m. Friday, the New York Federal Reserve Bank had agreed that it would provide financing to Bear Stearns via J.P. Morgan Chase. J.P. Morgan Chase was used as a conduit because, as a commercial bank, it already has access to the Fed's discount window, is under the Fed's supervisory authority, is Bear's clearing bank and knows Bear well from a previous discussion of a possible strategic tie-up.

Thus, technically the Fed still hasn't lent directly to investment banks. But the central bank has explicitly assumed the risk of the loan. If Bear fails and the collateral it posts is insufficient to cover the loan, the Fed will sustain a loss. Officials say there is no preset maximum amount of the loan, other than how much collateral Bear is able to provide to meet the Fed's requirements.

At 9 a.m. Friday, Mr. Geithner; Mr. Paulson; Erik Sirri, head of market regulation at the SEC; and Messrs. Schwartz and Dimon held a conference call with representatives from Bank of New York Mellon and the Wall Street securities firms. Mr. Paulson said all had a stake in making the effort work.

The role of J.P. Morgan as Bear's savior is somewhat paradoxical, considering the recent tense relationship between the two firms. J.P. Morgan was one of several lenders that played a role in Bear's troubles last summer when J.P. Morgan demanded more collateral from one of Bear's struggling hedge funds. There was a heated conversation between Mr. Black, co-head of J.P. Morgan's investment bank, and Mr. Spector, then Bear's co-president, over Bear's reluctance to bail out the hedge fund. J.P. Morgan ultimately served Bear with a default notice on a loan to Bear.

Prosecutors in the U.S. Attorney's office for the Eastern District of New York, based in Brooklyn, are investigating whether the funds' managers misled investors in a way that constitutes fraud.

In addition to being a Bear creditor, J.P. Morgan is a regular trading partner with Bear and therefore could be on the hook for big losses if Bear fails.

Last fall, J.P. Morgan played a leading role in a Treasury-backed effort to thaw frozen credit markets by creating a "superfund" for certain off-balance-sheet investment vehicles that were struggling. Ultimately, the owners of those investment vehicles resolved the problems on their own.

The role of rescuer has long been part of J.P. Morgan's history. In what's known as the Panic of 1907, a semi-retired J. Pierpont Morgan helped stave off a national financial crisis when he helped to shore up a number of banks that had seen a run on their deposits. And when the New York Stock Exchange was close to running out of cash, the financier raised $25 million -- supposedly in 10 minutes -- that kept the exchange in business.

Some 80 years later, the bank played a similar role when it helped organize a government-backed bailout of Chicago's Continental Illinois, a bank sagging under a mountain of bad loans.

J.P. Morgan has been on the prowl for acquisitions. Although it is thought to be most interested in a large regional bank, Bear's assets could be too good, and too cheap, to turn down.

J.P. Morgan might also be interested in buying just Bear's prime brokerage business, a key Wall Street business -- used by hedge funds to borrow money and clear trades -- that J.P. Morgan doesn't now have. The Bear unit has a good reputation but has suffered from a loss of cash balances in recent months.

Rating agencies cut their credit ratings on Bear. Moody's rating is now three levels above junk; S&P's and Fitch's ratings are two above junk.

The immediate capital infusion isn't likely to restore enough confidence in Bear to stop the exodus. Robert Sloan, a managing partner of New York-based S3 Partners LLC, a financing specialist for hedge funds, said that two of them on Friday pulled whatever money of theirs still remained in Bear's prime-brokerage operation. "Once Bear started to come out with: 'Hey, this is why we're OK, this is why we're still liquid and you should keep your assets here,' they were basically telling you to move your business," Mr. Sloan said.

Serena Ng, David Enrich, Aaron Lucchetti, Jenny Strasburg and Gregory Zuckerman and Michael M. Phillips contributed to this article.

Write to Robin Sidel at

JPMorgan Agrees To Buy Bear Stearns

Chinese Firm Also Weighing Options Against Ailing Investment Bank

The announcement from both the Fed and JPMorgan comes ahead of what some analysts expected to be a brutal day for global stocks. Asian stocks fell sharply after renewed worries about the U.S. financial system sent stocks tumbling on Wall Street.

In Tokyo, Japan's benchmark Nikkei stock index plunged early Monday more than 3 percent. In Seoul, the Korea Composite Stock Price Index fell more than 2.5 percent. Hong Kong's benchmark index tumbled over 4 percent in early trading and markets in Australia and New Zealand also fell.

A collapse of Bear Stearns could have created a further crisis of confidence in world financial markets amid a deepening credit crunch. JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago.

(CBS/AP) Wall Street has received word that JPMorgan Chase and Co. reached an agreement to acquire wounded investment bank Bear Stearns Cos. for $2 a share. The deal is valued at $236.2 million, a stunning collapse for one of the world's largest and most venerable investment banks. Bear Stearns shares closed Friday at $30 a share.

JP Morgan says the all-stock deal has received the required approvals from the federal government and the Federal Reserve.

The Fed will provide special financing to JPMorgan Chase in connection with the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.

The two sides reportedly wanted to lock up a deal before investors can put pressure on both of their stocks once Asian markets open for business.

The Wall Street Journal reported earlier that the two banks were close to a deal for JPMorgan to buy Bear for $20 a share, or $2.2 billion.

Meanwhile, China's Citic Securities Co. said late Sunday it cannot guarantee it will reach a final agreement to buy into Bear Stearns after Bear's financial crisis triggered a bailout plan.

The statement coincides with Citic Securities' latest final earnings reports showing its 2007 net profit more than quintupled from a year earlier as the domestic stock market's bull run increased trading commissions and underwriting fees.

"We haven't signed any formal agreement, we haven't paid any money and we can't guarantee reaching a final agreement in the future," Citic Securities said in a statement.

It said it is still communicating with Bear Stearns on major terms of the deal and due diligence related to the deal has not been completed yet.

Citic Securities and Bear Stearns said in October that Citic Securities would take a 6 percent stake in Bear Stearns with an investment of $1 billion, while Bear Stearns would take a 2 percent stake in Citic Securities with a $1 billion investment.

The Chinese company said it will closely monitor the impact from the U.S. subprime crisis and conduct an overall evaluation of the deal.

It said it will set the direction of its strategic cooperation with Bear Stearns based on the results of its evaluation and the development of the U.S. subprime crisis.

Citic Securities' earnings statement was in line with the comments from its corporate parent China International Trust & Investment Corp., or Citic Group.

Kong Dan, Chairman of Citic Group, said earlier in the day that its Citic Securities unit is rethinking its deal to buy into Bear Stearns and would conduct an "overall evaluation" of the deal.

Kong said Citic Securities would be closely watching how Bear is able to respond to a liquidity crisis and remained concerned about the bank's troubles, which began unfolding last year with subprime losses.

Bear Sterns suffered a sharp liquidity crisis late last week. JPMorgan Chase & Co. agreed to provide Bear with emergency financing for four weeks, with guarantees from the Federal Reserve, while a permanent solution is sought for Bear's troubles.

Kong said Citic Securities had been in touch with JPMorgan on the matter, but he referred to the communication as "technical" in nature and didn't elaborate.

Citic Securities is China's largest brokerage by earnings and is part of Citic Group, a financial conglomerate set up in 1979 by then Vice President Rong Yiren.

It's the War Economy, Stupid!

With the country poised on the precipice of a recession, if not already in one, the economy has eclipsed Iraq as the most pressing issue of the moment. But rather than being treated as discrete items on a laundry list of issues, the war and the economy should be linked. While the current economic meltdown has other causes, one of the biggest obstacles we face in pulling out of this crisis is the staggering cost of the war in Iraq.

In the five years since the war began, the United States has spent more than $522 billion in Iraq. This year spending will easily top $160 billion. Yet, as Joseph Stiglitz and Linda Bilmes point out in their new book, The Three Trillion Dollar War, the short-term costs pale in comparison with the sum our nation will spend over the long term.

Ongoing veterans' health costs, debt payments and the cost of re-equipping the military are some of the reasons for this outrageous $3 trillion bill. At the same time that the war has imposed a huge burden on taxpayers, it has precipitated one of the largest transfers of wealth and power in modern history. By helping to drive up world oil prices, it has produced a massive redistribution of wealth from working Americans and other oil and gas consumers to a handful of oil producers.

Given the logic of military Keynesianism, one might think that spending on the war would keep the economy humming. With soldiers receiving signing bonuses of $10,000 or more, defense industry stocks rising nearly 20 percent last year and military contractor CEOs bagging tens of millions (see centerfold), some pockets are flush with cash.

But, as Robert Pollin and Heidi Garrett-Peltier explain on page 15, military spending is one of the least effective tools for stimulating the economy. Redirecting Iraq War funds to education, healthcare, renewable energy and infrastructure would create up to twice as many jobs.

In the heat of their battle for the Democratic nomination, Hillary Clinton and Barack Obama have neglected to emphasize the relationship between war spending and our economic woes. And the fact is, their Iraq plans--both of which allow for a residual force to remain after combat troops are withdrawn--do not do enough to rein in the costs.

As for GOP nominee John McCain, his announcement that it wouldn't trouble him if US troops stay in Iraq for "a hundred years" suggests that the long-term costs will exceed $3 trillion if he is elected President. All the candidates, meanwhile, want to increase the already enormous military budget.

Former candidate John Edwards is lending his voice to the Iraq/Recession campaign led by, which aims to emphasize the connection between the billions spent in Iraq and our crumbling economy.

As MoveOn frames it, "the tradeoffs are stark: Bombs or unemployment insurance for people laid off as the economy slows?

Billions for Halliburton and Blackwater, or help for people on the verge of losing their homes because of the subprime meltdown?"

Withdrawing from Iraq would also free up resources for the government to spend on targeted humanitarian relief for Iraqis, ideally through an independent relief organization. If the United States provides war reparations, it should put the money in a UN-administered trust for the Iraqi people, to be used for reconstruction or to help fund a multinational peace force.

The United States must not compound one strategic mistake--invading Iraq and breaking the Iraqi state--with another, funding an intensified civil war and a corrupt Iraqi government.

For both America and Iraq, peace is the path to prosperity.

Published on Sunday, March 16, 2008 by Reuters

Housing Group Challenges Fed’s Bear Stearns Deal

by Joanne Morrison

A housing and fair lending activist group has challenged the legality of the Federal Reserve’s quick approval of financing for Bear Stearns via JPMorgan Chase, questioning the Fed’s authority to approve the deal because it involves a non-bank institution.

Inner City Press/Community on the Move, in a complaint filed with the Fed late Saturday, called the central bank’s brokering of the deal “entirely illegal” and anticompetitive, and questioned whether sufficient Fed members had voted for it.

In a first step toward challenging the bailout, Inner City Press questioned the legality of the Fed approving the deal without public notice, on the grounds Bear Stearns “is not a banking holding company and does not own a bank.”

The Fed approved financing to Bear Stearns through JPMorgan in an emergency meeting Friday morning.

It was the Fed’s first rescue of a broker since the Great Depression and its latest effort to soothe financial markets roiled by fallout from rising mortgage defaults.

But Matthew Lee, executive director of Inner City Press, vowed to take all needed legal actions against the deal.

“The Fed has hit a new low with this, they did nothing to protect consumers from predatory lending and now their response is to bail out one of the most notorious enablers of predatory lending with no benefit to struggling consumers,” said Lee.

“This should be taken as far as it can go to finally bring the Federal Reserve to account that they work for the public interest and not only Wall Street, particularly in a time of crisis,” he told Reuters on Sunday.

The Fed could not immediately be reached for comment.

Inner City Press, a nonprofit group that has challenged the nation’s key bank mergers over the past decade in an effort to ensure poorer communities are served fairly, also questioned why only four of the five Fed governors approved the measure.

The Fed approved the deal between JPMorgan and Bear Stearns under Depression-era laws allowing it to do so under “unusual and exigent circumstances.” This provision, however, requires an affirmative vote of not less than 5 members of the board.

At present, there are only five members on the board with two vacancies, but only four approved the measure because governor Frederic Mishkin was not present, according to the Federal Reserve.

But current law mandates that no less than five members can vote on the matter and states that members can be contacted through any electronic means, including by telephone and e-mail.

“There has been no showing that, given technology in 2008 (as opposed to the 1930s when this language was enacted), the required attempts to contact Gov. Mishkin were made,” Lee wrote in the complaint.

Inner City Press also questioned whether the deal could be finalized without antitrust review.

“Third, to allow this relation between the nation’s third largest bank and fifth largest brokerage, without any antitrust review, even with the required votes (which the Fed) did not have, is unlawful,” the complaint stated, requesting public hearings on the matter.

The complaint also asks for a probe into Bear Stearns’ disclosure of its financial condition, citing an interview the firm’s chief executive gave on CNBC television earlier in the week during which no mention of the scope of the firm’s financial troubles were made.

JPMorgan gets Bear Stearns for a bargain-basement $236M

JPMorgan to buy Bear for $2 a share

By JOE BEL BRUNO and MADLEN READ, AP Business Writers 6 minutes ago

NEW YORK - Just four days after Bear Stearns Chief Executive Alan Schwartz assured Wall Street that his company was not in trouble, he was forced on Sunday to sell the investment bank to competitor JPMorgan Chase for a bargain-basement price of $2 a share, or $236.2 million.

The stunning last-minute buyout was aimed at averting a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system sparked by the collapse in the subprime mortgage market. Bear Stearns was the most exposed to risky bets on the loans; it is now the first major bank to be undone by that market's collapse.

The Federal Reserve and the U.S. government swiftly approved the all-stock buyout, showing the urgency of completing the deal before world markets opened. The Fed also essentially made the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.

"This is going to go down in very historic terms," said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. "This is about credit being overextended, and how bad it is for major financial institutions and for individuals. This is why we're probably heading into a recession."

JPMorgan Chase & Co. said it will guarantee all business — such as trading and investment banking — until Bear Stearns' shareholders approve the deal, which is expected to be completed during the second quarter. The acquisition includes Bear Stearns' midtown Manhattan headquarters.

JPMorgan Chief Financial Officer Michael Cavanaugh did not say what would happen to Bear Stearns' 14,000 employees worldwide or whether the 85-year-old Bear Stearns name would live on after surviving the Great Depression, two World Wars and a slew of recessions. He told analysts and investors on a conference call that JPMorgan was most interested in buying Bear Stearns' prime brokerage business, which completes trades for big investors such as hedge funds.

At almost the same time as the deal for control of Bear Stearns was announced, the Federal Reserve said it approved a cut in its lending rate to banks to 3.25 percent from 3.50 percent and created another lending facility for big investment banks. The central bank's official meeting is on Tuesday. Before the emergency move to lower the discount rate, which is the rate at which banks lend each other money, the Fed was widely expected to again cut its headline rate by as much as a full point to 2 percent.

"Having taking Bear Stearns out of the problem category, and the strong action by the Federal Reserve, we would anticipate the market will behave quite differently on Monday than it was Thursday or Friday," Cavanaugh said.

Some analysts expected it to be a brutal day for global stocks, nevertheless. Shortly after the news broke, Japan's benchmark Nikkei stock index plunged more than 3 percent in morning trading.

A bankruptcy protection filing of Bear Stearns could have heightened anxiety in world financial markets amid a deepening credit crunch. So far, global banks have written down some $200 billion worth of securities slammed amid the credit crisis — more write-downs could come. Last week, a bond fund controlled by private equity firm Carlyle Group faltered near collapse because of investments linked to mortgage-backed securities.

JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. It marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29.

"The past week has been an incredibly difficult time for Bear Stearns," Schwartz said in a statement. "This represents the best outcome for all of our constituencies based upon the current circumstances."

Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world's largest investments banks — it was a prop for the U.S. economy and the global financial system. An outright failure would cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.

After days of denials that it had liquidity problems, Bear was forced into a JPMorgan-led, government-backed bailout on Friday. The arrangement, the first of its kind since the 1930s, resulted in Bear getting a 28-day loan from JPMorgan with the government's guarantee that JPMorgan would not suffer any losses on the deal.

This is not the first time Bear Stearns has earned a place in Wall Street history. A decade ago, Bear Stearns refused to help bail out a hedge fund that was deemed "too big to fail." On Friday, the tables had turned, with the now-struggling investment bank in need of the same kind of aid.

Bear Stearns was founded in 1923 and in recent years was best known for its aggressive investing in mortgage-backed securities — and what was once a cash cow turned into the investment bank's undoing.

In June, two Bear-managed hedge funds worth billions of dollars collapsed. The funds were heavily invested in securities backed by subprime mortgages. Until that point, subprime mortgage-backed securities were immensely popular with investors because of their profitability.

The funds' demise and subsequent problems in the credit markets called into question Bear Stearns' ability to manage its own risk and the leadership ability of then-Chief Executive James Cayne. Critics of the company said Cayne spent too much time away from the office last year playing golf and bridge as the problems unfolded.

Cayne is the same executive who refused to let Bear Stearns provide support as part of a Federal Reserve-led plan to rescue Long-Term Capital Management in 1998. His reticence was said to deeply anger some of his fellow Wall Street CEOs, and the episode came up every time Bear was reported to be in trouble in recent months.

Cayne took over from the legendary Alan "Ace" Greenberg in 1993. Greenberg joined Bear Stearns as a clerk, working his way up through the ranks to eventually take over as CEO in 1978. Greenberg was known for his irreverent style, and his regular memos to employees were turned into a book called "Memos from the Chairman."

Before Greenberg's ascendancy to CEO, Bear Stearns began to expand from its New York roots throughout the 1950s and 1960s, opening international offices and expanding its U.S. operations.

AP Business Writers Jeannine Aversa in Washington and Stephen Bernard contributed to this story.

Fed takes new steps to ease crisis

Asian stocks fall sharply on Bear deal

Investors await Bear impact, Fed meeting

Paulson: Govt will act to aid markets

Fed set to slash U.S. rates as credit turmoil rages

Dollar caught in Fed, ECB cross-fire

Global economic outlook

Bear Stearns bailout? CNN

US bank gets emergency funds BBC Caution: Crumbling Wall Street earnings ahead

A SUREFIRE RECIPE for a panic:

1. Deny there is a problem
2. Acknowledge "temporary" problem, deny there's a crisis
3. Stop issuing denials, demand help from on high
4. Claim problem solved after authorities promise help
5. Sell when the bad news keeps coming
6. Complain authorities are not doing enough to help
7. Go to #3, repeat as necessary

The spin may change depending on the spinner's place within this vicious cycle, but there's no getting around the reality that we have a protracted panic on our hands. Housing's shot, the banking system wounded, the consumer suspect. And the markets have given up hope for heroic measures from a deeply unpopular laissez-faire presidential administration or the stammering Fed.

Bears have now clawed back about half of the relief gains minted during the most recent rally, which coincided with vain hopes for a half-point interest rate cut. And though the Fed got the lion's share of the blame for the ensuing selloff, this was also a referendum on the government's "Hope Now" mortgage relief plan. The inescapable conclusion: There is not much hope for a rescue by a bureaucracy that earned its stripes in New Orleans and Baghdad. The S&P is down a rather hopeless 60 points since Hope Now had its ticker-tape parade less than two weeks ago.

I'll buy the resiliency of the U.S. economy for a dollar (not a penny more) and strong overseas growth for few Yuan more.

But after surveying what the government, the Federal Reserve and banks are doing — and not doing — in response to the credit market turmoil, I'm more convinced than ever that there's worse in store.

Keep A Close Watch On Monday Markets In The USA…This is trouble not a solution!

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