JPMorgan agrees to buy Bear Stearns
BEAR Stearns reached an agreement to sell itself to JPMorgan Chase, as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.The deal calls for JPMorgan to pay $US2 a share in a stock-swap transaction, with JPMorgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies' boards have approved the transaction, which values Bear Stearns at just $US236 million ($251.4 million) based on the number of shares outstanding as of February 16. At Friday's close, Bear Stearns's stock-market value was about $US3.54 billion. It finished at $US30 a share in New York Stock Exchange composite trading on Friday.
Effective immediately, JPMorgan Chase is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations. The deal isn't subject to any conditions, except shareholder approval. It is expected to close before the end of the second quarter.
Government regulators, including the Federal Reserve and the Office of the Comptroller of the Currency, have given their blessing to the transaction
Many well-known investors, from billionaire Joe Lewis to Bruce Sherman, the head of Legg Mason's Private Capital Management money-management firm, have seen the value of their stakes in Bear Stearns plummet. The pain could be most acute for Bear Stearns's employees, who are steeped in a culture of personal ownership -- and hold about a third of the firm's shares outstanding.
Through the weekend, Bear Stearns bankers were summoned to the company's headquarters on New York's Madison Avenue, where they were told to prepare lists of ongoing deals and business relationships. Representatives from prospective buyers circulated through conference rooms, with JPMorgan executives asking questions of Bear Stearns's senior management. A separate bidding group, including J.C. Flowers & Co and Kohlberg Kravis Roberts, also was in the mix, said a person familiar with the discussions.
Bear Stearns shares, which traded as high as $US170 in January 2007, fell 47 per cent on Friday after the firm was forced to seek emergency funding from the Federal Reserve and JPMorgan to stay afloat amid a severe cash crunch.
One stumbling point for a sale appeared to be the amount of risk that JPMorgan would absorb in any type of transaction. While JPMorgan was eager to snap up some of Bear Stearns assets -- such as its prime brokerage business that caters to hedge funds -- chief executive officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm's exposure, said people familiar with the matter. Spokesmen for Mr Dimon couldn't be reached.
Despite the emergency funding from JPMorgan and the Federal Reserve that was announced on Friday and gives Bear access to cash for an initial period of 28 days, the clock is ticking on the 85-year-old firm. Late on Friday, credit-ratings firms downgraded Bear Stearns to two or three levels above junk status. The downgrades also had a big impact on Bear Stearns's viability, as they severely crimped the firm's number of potential trading partners.
Regulators, bankers and investors are concerned Bear Stearns's stock could plummet even further when the US stock market opens today. A continued exodus by parties with which the investment bank trades could even cause it to collapse. Still, unwinding Bear Stearns could be a nightmare because of the plethora of Wall Street firms with which it has dealings.
Analysts and investors are bracing for more bad news as securities firms report earnings this week, though Bear Stearns's results are expected to surpass the average estimate from analysts surveyed by Thomson Financial, say people familiar with the matter. A Bear spokesman declined to comment.
Meanwhile, worries are deepening that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings chief executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns's troubles, cut short a trip to India and returned home, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls on Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.
Investors' concerns that the flight of worried Bear Stearns customers last week might spread to other firms is likely to make for a tense opening today on Wall Street. Mr Paulson said in a TV interview yesterday that the government "would do what it takes" to protect the integrity of the financial system.
On several occasions over the weekend, Mr Paulson spoke about the Bear Stearns negotiations with Federal Reserve chairman Ben Bernanke and New York Federal Reserve Bank president Timothy Geithner, according to people familiar with the matter.
The takeover agreement signals an abrupt and crushing end for Bear Stearns, one of Wall Street's best-known firms. Though it had survived many previous market swoons, it was savaged by the crisis in the nation's mortgage market, which began last August.
Over the weekend, some Bear Stearns employees were hoping a foreign bank would emerge as the winning suitor, since that might mean fewer job cuts than in a domestic acquisition. But those prospects dwindled, leaving JPMorgan in the prime position to acquire the firm.
For JPMorgan, a Bear Stearns deal essentially would be one of convenience. The big New York bank hadn't planned on buying a Wall Street firm. It was focusing instead on the prospect of buying a large regional bank. But people familiar with the matter said that the Bear acquisition doesn't preclude JPMorgan from pursuing that strategy.
One of Bear's biggest attractions for JPMorgan is its prime brokerage business which caters to hedge fund clients. JPMorgan doesn't have such a business and executives there have long said that they would like to add those operations to the bank's portfolio. JPMorgan has been one of the banks eyeing the prime brokerage business of Bank of America. That business reportedly is on the auction block.
JPMorgan executives, however, are far less interested in the rest of Bear's operations, including its investment-banking unit. JPMorgan already has a substantial investment-banking operation with ties to many high-profile clients. Indeed, executives have scoffed at the idea that JPMorgan would buy a large Wall Street firm despite repeated speculation that the bank would ultimately buy a rival such as Morgan Stanley.
"Fill-ins, piecemeals, joint ventures, small purchases, where they're filling gaps, (we are) absolutely, always open, always interested. But on doing something major that would create a dramatically different landscape, not in my lifetime," Steve Black, co-head of JPMorgan's investment bank, said last year.
Over time, Bear Stearns's misfortune could bear fruit for JPMorgan. Bear Stearns's investment-banking unit, which underwrites stocks and bonds and advises on mergers, and its fixed-income and capital-markets trading businesses have been badly bruised by the credit crunch but still have some value.
Likely even more valuable are Bear Stearns's clearing unit, which settles trades and also services and lends to hedge funds, and an investment-advisory business catering to wealthy customers. Both of those operations have suffered from withdrawals in recent days.
The probable sale of Bear Stearns is the latest in the cascading mortgage-related blows that began last summer and have resulted in staggering losses and write-downs on Wall Street, the ouster of several high-profile CEOs and an epidemic of worry that the financial system faces even more turmoil.
On Friday, Bear Stearns sought and received emergency funding backed by the federal government. Both the Fed and J.P Morgan stepped in to keep Bear afloat as investors moved to pull assets out of the firm. In stepping in, the Fed was trying to move aggressively to prevent the firm's from spreading to the broader economy. The lifeline gave Bear access to cash for an initial period of 28 days -- but it was widely believed Bear would be sold within days to keep it from going under.
The Fed's unusual intervention was motivated by a concern that a rapid and disorderly failure of Bear Stearns would wreak havoc on the markets in which the firm is an intermediary, particularly the huge and important securities-repurchase, or "repo" market.
Bear Stearns risked defaulting on extensive "repo" loans, on which firms pledge securities as collateral for overnight loans from money-market funds. If that happened, other securities dealers would find their access to repo loans restricted. The pledged securities behind those loans could be dumped in a fire sale, deepening the plunge in securities prices.
As a result, one of regulators' priorities in any deal for Bear Stearns or its parts is to minimise the risk to the financial system. That suggests that they want those counterparties furthest removed from Bear Stearns itself to know immediately where they stand in any deal, and for a buyer to have sufficient financial strength to reassure those counterparties.
Bankruptcy experts said filing for bankruptcy protection wouldn't have been an attractive option for Bear Stearns, partly due to recent changes in the federal Bankruptcy Code relating to financial instruments like derivatives and repurchasing trades. Unlike most parties in bankruptcy, lenders in such transactions aren't stayed or prevented from acting to seize or control the assets involved in those deals.
"They can send you a letter saying the value of the assets is falling, so either pay us back or we will liquidate the asset," said Holly Etlin, a managing director at AlixPartners, a turnaround and business advisory firm.
Financial regulators, which had been monitoring the situation at Bear on a daily basis leading up to Friday, beefed up their presence inside the firm over the weekend. Staff from the Securities and Exchange Commission's examinations group and trading and markets division, which monitors capital levels for soundness, worked with representatives from Wall Street's self-regulator, the Financial Industry Regulatory Authority, and Federal Reserve.
The SEC and Finra staff inspected Bear's books to ensure that if customers began pulling their accounts that there was a process to unwind the positions fairly, so as to prevent additional losses.
The regulators also had staff at other firms to monitor the brokerage firm's capital level amid speculation it could face liquidity problems. A person familiar with regulators said their presence wasn't to suggest that any particular firm was in trouble, rather it was to examine whether there was enough cash on hand to deal with potential problems.
Bush's Bull's-Eyes
Leadership: If you wonder why we run many of President Bush's speeches verbatim, we can think of at least three reasons — the most important of which is that most of what he says is right on the money.The other two are that (a) Bush's speeches are rarely covered in any depth by mainstream media hostile to much of what he says, and (b) when the speeches are covered, only a couple of points — of interest to selfsame media — usually are highlighted.With so many problems confronting the U.S., it's a shame there isn't more direct, unfettered communication between the people and their president. Maybe if the public was given a chance to hear the president out, the president wouldn't be held in such low esteem in public opinion polls.
Bush's address Friday to the Economic Club of New York was only the latest in which he has spoken forcefully and authoritatively on a major issue.
The economy, we're told, suddenly tops Americans' list of concerns (now that it's doing poorly, as the media keep reminding us, and that the previous No. 1 concern, the war in Iraq, is going well, as the media are loath to report).
Sure enough, the first headlines to cross the wires — "Bush Concedes Economy Troubled" and "Bush Acknowledges Weakness In U.S. Economy" — read just as we expected. And let's face it, many people never get the past the headlines.
The Bush we watched and listened to, however, brought to mind anything but "trouble" or "weakness." As in other recent speeches, he spoke passionately about America's ability to rebound from economic downturns — and indeed its remarkable performance in the face of almost unprecedented difficulties in the past seven years.
He also struck us as a man of action, armed with very specific (and compassionate) plans to deal with the economic slowdown and the housing crisis that brought it on.
As always, the policies Bush set out were backed by the soundest of economic principles. Note his concern about government actions "that will make it harder for the markets to recover — and when they (do) recover, make it harder for this economy to be robust."
Note also his avid support of free trade in general and the pending trade pact with Colombia in particular. "Devastating" is not too strong a word, in our opinion, to describe the consequences if Congress turns its back on this important Latin American ally.
Bush's principled stands were even more in evidence in the brief question-and-answer period that followed his speech (and which we didn't have room to include). There, he spoke of the "easy politics" of protectionism, isolationism and even nativism.
"Probably the most grim reminder of what can happen to America during periods of isolationism and protectionism is what happened in the '30s, when we had this 'America first' policy, and (the) Smoot-Hawley (tariff). And look where it got us."
But Bush also was blunt in the Q&A in acknowledging that America's energy policy "has not been wise." "You can't build a refinery in the United States," he noted. "You can't expand a refinery in the United States. The Congress believes we shouldn't be drilling for oil and gas in a productive part of our country like ANWR because it will destroy the environment, which in fact it won't.
"Technology is such that it will enable us to find more oil and gas. And so, as a result of us not having been robust in exploring for oil and gas at home, we're dependent on other countries."
In these and other messages, this president is — to borrow a favorite phrase of his critics — speaking "truth to power." Problem is, he's not getting a fair listen.
Obama Attended Hate America Sermon | ||
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Contrary to Senator Barack Obama’s claim that he never heard his pastor Jeremiah A. Wright, Jr. preach hatred of America, Obama was in the pews last July 22 when the minister blamed the “white arrogance” of America’s Caucasian majority for the world’s suffering, especially the oppression of blacks.
Senator Obama has sought to separate himself from his pastor’s incendiary remarks, issuing a statement Friday rejecting them as “inflammatory and appalling” but failing to renounce Wright himself for his venomous and paranoid denunciations of America.
In his press release, Obama claimed, “The statements that Rev. Wright made that are the cause of this controversy were not statements I personally heard him preach while I sat in the pews of Trinity [United Church of Christ] or heard him utter in private conversation.”
Appearing on cable news shows this past weekend, Obama claimed when he saw recent videos that have Wright making such comments as “God damn America,” he was “shocked.” Obama implied that the reverend had not used such derogatory language in any of the church services Obama attended over the past two decades.
If Obama’s claims are true that he was completely unaware that Wright’s trademark preaching style at the Trinity United Church of Christ has targeted “white” America and Israel, he would have been one of the few people in Chicago to be so uninformed. Wright’s reputation for spewing hate is well known.
In fact, Obama was present in the South Side Chicago church on July 22 last year when Jim Davis, a freelance correspondent for Newsmax, attended services along with Obama. [See: ”Obama’s Church: Cauldron of Division.”]
In his sermon that day, Wright tore into America, referring to the “United States of White America” and lacing his sermon with expletives as Obama listened. Hearing Wright’s attacks on his own country, Obama had the opportunity to walk out, but Davis said the senator sat in his pew and nodded in agreement.
Addressing the Iraq war, Wright thundered, “Young African-American men” were “dying for nothing.” The “illegal war,” he shouted, was “based on Bush’s lies” and is being “fought for oil money.”
Obama’s most famous celebrity backer, Oprah Winfrey began attending Wright’s church in 1984. Last year, Newsmax magazine reported that Winfrey abruptly stopped attending years ago, and suggested that she did so to distance herself from Wright’s inflammatory rhetoric. She soon found herself a target of Wright, who excoriated her for having broken with “traditional faith.”
The Reverend Wright’s anti-white theology that Senator Obama expressed surprise over is evident on the church’s website. The site says the congregation subscribes to what it calls the Black Value System, which is described as a disavowal of “our racist competitive society” and the pursuit of “middle-classness.” That is defined as a way for American society to “snare” blacks rather than “killing them off directly” or “placing them in concentration camps,” just as the country structures “an economic environment that induces captive youth to fill the jails and prisons.”
“In the 21st century, white America got a wake-up call after 9/11/01,” Wright wrote in the church-affiliated magazine Trumpet four years after the attacks. “White America and the western world came to realize that people of color had not gone away, faded into the woodwork or just ‘disappeared’ as the Great White West kept on its merry way of ignoring black concerns.”
The Relationship Unravels
Senator Obama now is attempting to minimize his long and close relationship with the controversial minister. On Friday, John McCain’s campaign distributed a Wall Street Journal op-ed “Obama and the Minister” written under my byline based on my reporting for Newsmax going back to early January of this year.
The op-ed included details of a sermon Wright gave at Howard University blaming America for starting the AIDS virus, training professional killers, importing drugs, shamelessly supporting Israel, and creating a racist society that would never elect a black man as president. [See: “Obama’s Minister’s Hatred of America.”]
Obama’s campaign quickly responded to the Wall Street Journal op-ed, posting a statement on the Huffington Post. In his statement, Obama acknowledged that some of Wright’s statements have been “inflammatory and appalling.”
Saying he strongly condemns Wright’s comments, Obama continued, “I categorically denounce any statement that disparages our great country or serves to divide us from our allies. I also believe that words that degrade individuals have no place in our public dialogue, whether it’s on the campaign stump or in the pulpit. In sum, I reject outright the statements by Rev. Wright that are at issue.” [emphasis added]
Again, Obama moved to narrowly distance himself from specific comments Wright had made, while still praising his minister in recent interviews for leading him to Jesus and preaching a “social gospel.”
Obama went on to claim that he first learned about Wright’s controversial statements when he began his presidential campaign. But this assertion conflicts with the fact that just before Obama’s nationally televised campaign kickoff rally on Feb. 10, 2007, the candidate disinvited Wright from giving the public invocation.
At the time, Wright explained: “When [Obama’s] enemies find out that in 1984 I went to Tripoli” to visit Col. Muammar el-Qaddafi with Nation of Islam leader Louis Farrakhan, “a lot of his Jewish support will dry up quicker than a snowball in hell.”
According to Wright, Obama then told him, “'You can get kind of rough in the sermons, so what we’ve decided is that it’s best for you not to be out there in public.'” Still, Obama and his family prayed privately with Wright just before the presidential announcement.
Apparently Obama never foresaw Wright’s sermons making national television or becoming a sensation on YouTube. But lending graphic detail to the saga, ABC News and other networks began running a 2003 sermon in which Wright said, “The government gives them the drugs, builds bigger prisons, passes a three-strike law and then wants us to sing ‘God Bless America.’ No, no, no, God damn America, that’s in the Bible, for killing innocent people ... God damn America for treating our citizens as less than human. God damn America for as long as she acts like she is God and she is supreme.” [Click Here to see video]
Obama has described Wright as a sounding board and mentor. Wright is one of the first people Obama thanked after his election to the Senate in 2004. Obama consulted Wright before deciding to run for president. The title of Obama’s bestseller “The Audacity of Hope” comes from one of Wright’s sermons. Obama’s “Yes We Can!” slogan is one of Wright’s exhortations.
Apologists for Wright have said that what he says is normal in black churches, and many blacks claim such preaching cannot be understood by whites.
“If you’re black, it’s hard to say what you truly think and not upset white people,” the New York Times quoted James Cone as saying. Cone is a professor at Union Theological Seminary and the father of what is known as black liberation theology.
But Juan Williams, a Fox News commentator and author of “Enough: The Phony Leaders, Dead-End Movements, and Culture of Failure That Are Undermining Black America,” tells Newsmax that Wright’s sermons reflect “the victim mindset that is so self-defeating in the black community and one that is played on by weak black leadership that chooses to have black people identified as victims rather than inspiring them as people who have overcome. In posing as victims, they say the most prejudiced and vicious things, not only about whites but about America. They call it theology. In fact, it’s nothing but bigotry.”
In failing to condemn Wright himself and claiming that he was unaware of the preacher’s hate-filled speech, Obama is continuing a longstanding pattern.
Obama often refers to Wright as being "like an old uncle, who sometimes says things I don't agree with." Wright is not Obama’s “uncle” — a person born into a blood relationship — but a man he has cultivated for decades as a close friend, mentor and adviser.
After Newsmax broke the story on Jan. 14 that Wright’s church gave an award to Louis Farrakhan in December for lifetime achievement, Obama again sought to denounce his minister’s action without criticizing Wright himself.
Like Wright, Farrakhan has repeatedly made hate-filled statements targeting Jews (calling Judaism a “gutter religion”), whites, America, and homosexuals. He has called whites “blue-eyed devils” and the “anti-Christ.” He has described Jews as “bloodsuckers” who control the government, the media, and some black organizations.
After the Newsmax story, Obama issued a statement purportedly addressing the issue.
"I decry racism and anti-Semitism in every form and strongly condemn the anti-Semitic statements made by Minister Farrakhan," Obama said.
Again, Obama was careful not to condemn Farrakhan himself or Wright who had spoken adoringly of Farrakhan and put their church behind the award to the controversial Nation of Islam leader.
“When Minister Farrakhan speaks, black America listens,” Trumpet quoted Wright as saying. “His depth on analysis [sic] when it comes to the racial ills of this nation is astounding and eye-opening. He brings a perspective that is helpful and honest.”
Obama adroitly said, “I assume that Trumpet magazine made its own decision to honor Farrakhan based on his efforts to rehabilitate ex-offenders, but it is not a decision with which I agree.”
In fact, Trumpet is published by Wright’s church using the church’s offices. Wright’s daughters serve as publisher and executive editor.
Having gotten away with sidestepping Wright’s adoring comments about Farrakhan, Obama told Jewish leaders flatly in Cleveland on Jan. 24 that the award was because of Farrakhan’s work with ex-offenders. To date, no news outlet has pointed out that Obama’s claim is false.
Obama went on to explain away Wright’s anti-Zionist statements as being rooted in his anger over the Jewish state’s support for South Africa under its previous policy of apartheid. As with his claim that the award to Farrakhan was made because of his work with ex-offenders, Obama made that up. Wright’s statements denouncing Israel have not been qualified in any way.
On Fox News’ Hannity & Colmes on Saturday, Obama said he would have quit the church if he had “repeatedly” been present when Wright made inflammatory statements. He was not asked why he did not quit the church when it gave an award to Farrakhan.
Having considered Wright a friend and mentor for two decades, Obama now often mentions that his pastor recently retired. Wright suggested to the New York Times last year that he and Obama might have to do something of a distancing act in the run up to the election.
"If Barack gets past the primary, he might have to publicly distance himself from me," Wright was quoted by The New York Times. "I said it to Barack personally, and he said, ‘Yeah, that might have to happen.'" | ||
Salvaging Our North Korea Policy
There are signs, albeit small ones, that the Bush administration may be reaching the end of its patience with the Six-Party Talks on North Korea's nuclear weapons program. These signs could prove illusory. But as it nears its end, the administration has a serious responsibility: It must not leave its successor with an ongoing, failed policy. At a minimum, President Bush should not bequeath to the next president only the burned-out hulk of the Six-Party Talks, and countless failed and violated North Korean commitments.
![[Salvaging Our North Korea Policy]](http://s.wsj.net/public/resources/images/OB-BD826_oj_bol_20080316195919.jpg) |
| David Gothard |
Since they were conceived in spring 2003, the Six-Party Talks have stumbled around inconclusively. And for the last 13 months, Pyongyang has ignored, stalled, renegotiated and violated the Feb. 13, 2007 agreement.
Throughout all this "negotiation," which has mostly consisted of our government negotiating with itself, North Korea has benefited enormously. It's been spared the truly punishing sanctions that concerted international effort might have produced. In large part because of the appeasement policies of the two previous South Korean governments, Pyongyang has not felt the full impact of the Proliferation Security Initiative (PSI) on its outward proliferation efforts. The U.S. has muzzled its criticism of North Korea's atrocious oppression of its own citizens. And, perhaps most humiliatingly of all, the U.S., in a vain effort at chasing the mirage, gave up its most effective pressure point -- the financial squeeze -- allowing Pyongyang renewed access to international markets through institutions like Banco Delta Asia.
In fact, the protracted Six-Party Talks have provided Kim Jong-il with the most precious resource of all: the time to enhance, conceal and even disperse his nuclear weapons programs. Time is nearly always on the side of the would-be proliferator, and so it has proven here. In exchange for five years of grace to North Korea, the U.S. has received precious little in return.
Pyongyang is now stonewalling yet again on its promise to disclose fully the details of its nuclear programs, including its uranium enrichment efforts and its outward proliferation. The successful Israeli military strike against a Syrian-North Korean facility on the Euphrates River last September highlighted the gravity of the regime's unwillingness to do anything serious that might restrict its nuclear option.
President Bush should spend the next 10 months rectifying the Six-Party concessions and put North Korea back under international pressure -- efforts that would be welcomed by Japan, and South Korea's new, far more realistic President Lee Myung-bak. Here are the steps to take:
- Declare North Korea's repeated refusal to honor its commitments, especially but not exclusively concerning full disclosure of its nuclear programs, unacceptable. This is the easiest step, and the most obvious. It can happen immediately. Accept no further partial "compliance," as the State Department continuously tries to do. Make public what we know about the North's Syria project, and its uranium enrichment and missile programs, so our 2008 presidential candidates can have a fully-informed debate.
- Suspend the Six-Party Talks, and reconvene talks without North Korea. Although the talks could be jettisoned altogether, continuing them without the North allows Japan, South Korea and the U.S. to begin applying real pressure to China, the one nation with the capacity to bring Pyongyang's nuclear program to a halt. China has feared to apply such pressure, worried that it could collapse Kim Jong-il's regime altogether -- an accurate assessment of the regime's limited staying power. Nonetheless, the effect of Chinese reticence has been to preserve Kim and his nuclear program. It is vital that China know this policy is no longer viable.
- Strengthen international pressure on North Korea's nuclear and missile programs. Ramp up PSI cooperation with South Korea. Remind Russia of its own voluntarily-assumed obligations as a PSI core member. Remind China as well to comply with the sanctions imposed on North Korea by U.N. Security Council Resolutions 1695 and 1718 (which followed the North's 2006 ballistic missile and nuclear tests), and honor its other counterproliferation obligations. Tell them we will be watching with particular care, and that Chinese failure to increase pressure on North Korea will have implications in Sino-American bilateral relations. We can make this point privately to China rather that trumpet it publicly, but it should be made without ambiguity.
- Squeeze North Korea economically. Return the regime to limbo outside the international financial system, and step up action against its other illicit activities, such as trafficking in illicit narcotics and counterfeiting U.S. money. These and other "defensive measures" are nothing more than what any self-respecting nation does to protect itself, and the U.S. should never have eased up on them. Even now they can have a measurable impact on Kim Jong-il's weak and unsteady regime.
- Prepare contingency plans for humanitarian relief in the event of increased North Korean refugee flows or a regime collapse. Both China and South Korea have legitimate concerns about the burdens they would face if the North collapsed, or if increased internal economic deprivation spread instability. America and Japan should make it plain that they will fully shoulder their share of providing humanitarian supplies and assistance if either happened. Moreover, President Lee should increase pressure on Pyongyang -- by reiterating that South Korea will fully comply with its own constitution and grant full citizenship to any refugees from the North, however they make their way to the South.
Doubtless there are other steps. President Bush will not likely be able to solve the threat posed by North Korea's nuclear weapons program. Nonetheless, he still has time to implement policies that will allow him to leave office with the nation back on offense -- thereby affording his successor the chance to vindicate a return to the original Bush administration national security strategy.
Welfare Wean
Siamak Alian is something of a rarity in a Scandinavian welfare state -- a successful immigrant entrepreneur. Mr. Alian came to Sweden in 1989 with a degree in nuclear physics from the University of Tehran. Unable to find a job in his field, he pursued a degree in electronics and alongside his studies founded a computer equipment import company. Within six years, his firm grossed some €10 million annually.
![[Welfare Wean]](http://s.wsj.net/public/resources/images/OB-BD817_oj_sot_20080316192914.jpg) |
| Ryan Inzana |
Mr. Alian notes that many in his surroundings initially advised against becoming an entrepreneur: "Why should one start a business?" they asked. [...]Especially for immigrants, the first signal from Swedish society is not that you ought to work, let alone become self-employed. The message is that the state will take care of you.
In the Western world, Sweden is often considered a Social Democratic paradise, the irrefutable proof that the welfare state can transform society for the better. But outsiders, and still too many Swedes, tend to overestimate the gains and underestimate the costs of social engineering.
To start with, homogenous Sweden was already an egalitarian society with few social problems before the expansion of the welfare state. It is often forgotten that in 1950 Sweden had lower taxes, fewer trade restrictions and more hours worked per working-age person than contemporary U.S. -- and yet was already blessed with essentially the same flat income and wealth distribution it has today, half a century after the expansion of the welfare state.
In the 1950s and 1960s, the integration of migrants worked quite well. The foreign-born had a 20% higher employment rate than native Swedes in 1950. Half a century later, in the mature welfare state, the picture has dramatically changed. According to the latest figures, only 48% of non-Western immigrants are gainfully employed, which is 30 percentage points below the average. For this group, originating from places such as Turkey, Chile, the former Yugoslavia, the Middle East and North Africa, welfare dependency is nine times higher than for native Swedes.
No doubt, a generous welfare system initially helps many immigrant families, cushioning the transition to a new country. However, the combination of high taxes, a regulated labor market, the world's highest union-imposed minimum wages and the lavish transfer programs effectively keeps out immigrants from the labor market.
Last year, the OECD advised Sweden to pursue labor-market and welfare reforms to tackle immigrant unemployment. The OECD recommended policies such as "substantial easing of job security rules, more individual wage flexibility and considerable reductions in benefit levels."
Sweden's powerful unions and the left-leaning intellectual elites work against such reforms. Swedish voters, though, are beginning to have mixed feelings. In 2006, they ousted the Social-Democratic government and elected a center-right coalition that promised to cut taxes and benefits. Labor-market reforms, though, were missing from their election campaign.
High unemployment among immigrants is of course not confined to just Sweden or Scandinavia. Throughout Europe, governments have found that well-intentioned social insurance policies can lead to lasting welfare dependence, especially among immigrants. Belgium is the European country with the highest difference in employment rates between the foreign-born and natives. The images of burning cars in the suburbs of Paris that were broadcast around the world illustrate the kind of social and economic problems France is facing with its restive immigrant population.
Given the high barriers to entry, many immigrants in Europe no longer start accumulating essential language and labor market skills. This is in stark contrast with the situation across the Atlantic. For example, in 2000, Iranians in the U.S. had a family income that was 42% above the U.S. average. The income of Iranian immigrants in Sweden, however, was 39% below the country's average.
Uri Harkman, a 60-year-old Iraqi who runs the fashion company "Jonathan Martin" in Los Angeles, says countries such as the U.S. and Australia, which reward work and entrepreneurship, are better fitted to integrating immigrants than "Social Europe." "In the European welfare systems," he says, "it is too easy to live off the government and there are simply not enough incentives to work."
The high unemployment rate is not only a drain on public finances. It also removes the most efficient path to integration. Permanent welfare addiction has an adverse and long-lasting effect on immigrant communities and their norm formation.
When many adults in a neighborhood no longer work for their living, the younger generation is less likely to acquire necessary work ethics. If their role models are unemployed, chances are that they'll remain on the fringes of the host society as well. This can set off a vicious cycle of social tensions.
Immigrants may interpret their lower social standing as caused by racism and discrimination. Many natives in turn may interpret the low employment rates of foreigners as a sign of their sloth. That's an explosive mix of misperceptions and social failings.
Liberalization is no panacea for integration, and it is doubtful that economic reforms alone would eradicate the high unemployment among Europe's immigrants. But it can take us a long way toward that goal.
Mr. Hu's Tibet Replay
The last time Beijing cracked down on Tibet, it was 1989, the year of the Tiananmen Square massacre, and Hu Jintao ran the province. Today, violent scenes are playing out again in Tibet -- this time with Mr. Hu as China's president. It's a reminder that despite China's economic liberalization and some political opening, the authoritarian instincts of the country's leadership haven't changed.
![[Mr. Hu's Tibet Replay]](http://s.wsj.net/public/resources/images/OB-BD828_oj_3ti_20080316203151.jpg) |
| AP |
| Demonstrators on a street in Lhasa, Tibet, taken from Chinese television CCTV. |
The confrontation started with a peaceful protest led by monks last Monday, the anniversary of Tibet's national uprising against China in 1959, nine years after Chinese troops invaded. Beijing's swift response -- arresting several of the monks -- led to further protests, which escalated to mob violence in Lhasa on Friday. Cars were burned, shops looted and witnesses reported gunfire; state-run media said 10 civilians died in fires. The Tibetan government in exile in Dharamsala says the death toll is at least 80.
China has controlled Tibet for more than half a century, and across those years countless Tibetans have been killed and thousands of monasteries have been destroyed. It is still forbidden to display a photograph of the Dalai Lama in Tibet, much less call for freedom of religion, speech or assembly. In 1989, the military arrested peaceful protesters and Mr. Hu declared martial law for 14 months.
This time around, China's one-party leadership has another incentive to muffle protests: the Olympics. China won the Games after assuring the International Olympic Committee that it would respect human rights. The Tibetan uprising is thus a major embarrassment, all the more so because Beijing has been increasing its heavy-handed control of the province.
In August Beijing declared that reincarnated lamas, or religious leaders, could be appointed only by Beijing's State Administration for Religious Affairs, not by other monks, as Tibet's brand of Buddhism dictates. Beijing has also reignited its propaganda war against the Dalai Lama, calling him a "splittist" and forcing monks to disavow him. Chinese government officials and state-run media are blaming him for the unrest this week and claim the "Dalai clique" organized the protests.
On Saturday sympathy protests rippled across greater Tibet, extending into Qinghai, Gansu and Sichuan provinces, which have sizable Tibetan populations. Yesterday, protesters in Sichuan burned down a local police station, while thousands of monks in a different part of the province were placed under lockdown after a spontaneous protest. After an emergency meeting of provincial leaders on Saturday night, the standing committee of the Tibet Communist Party released a statement declaring a "people's war to oppose separatism and protect stability."
The irony is that since the early 1970s the Dalai Lama has advocated autonomy, not independence, for Tibet, and repeatedly disavows violence. He has called for China to deliver on the promises inherent in its constitution, which guarantees "regional autonomy" and "organs of self-government" for areas inhabited by minority nationalities. On Friday, he issued a statement urging Beijing to "stop using force" and urged "my fellow Tibetans not to resort to violence."
There's much Beijing could do to improve its rule in Lhasa. Allowing Tibetans to practice their religion freely would be a good place to start. Ending subsidies for Chinese settlers to move to Tibet and stopping the forced resettlement of Tibetan nomads would be welcome moves. Beijing could also benefit from taking its dialogue with the Dalai Lama more seriously; after he's gone, there's no guarantee that an equally moderate voice will take his place.
The Olympics were supposed to be a showcase for Chinese progress. Instead, the government's fear of political dissent and its authoritarian overreaction are showing the world that far too little has changed since Tiananmen.
Asian Stocks Tumble on Bear Stearns News
By Kelly Olsen, AP Business Writer
SEOUL, South Korea (AP) -- Asian stocks plunged Monday after JPMorgan Chase said it would acquire troubled U.S. investment bank Bear Stearns, signaling to investors the depths of the credit crisis.
JPMorgan said Sunday that it would acquire its rival in a deal valued at $236.2 million -- or $2 a share -- and that the Federal Reserve would provide special financing for the deal.
The buyout was aimed at averting a bankruptcy and a spreading crisis of confidence in the global financial system.
But to Asian investors the move showed that the credit crisis, triggered by defaults on risky U.S. mortgages amid a slowdown in the housing market, was far from over -- and fanned worries that troubles at big American banks were unlikely to be contained just to Bear Stearns.
"There is persistent credit uncertainty. Market players have been repeatedly let down which shows the subprime mortgage problems are so deep-rooted," said Atsuji Ohara, global strategist of Shinko Securities in Tokyo. "Just buying an investment bank does not solve the problem. Markets are prodding (the U.S. government) to inject public funds."
News of the acquisition of Bear Stearns, one of the world's largest and most venerable investment banks, came just before the opening of markets in Tokyo and Seoul.
Also, the Federal Reserve, in an extraordinarily rare weekend move, took bold action Sunday evening by cutting its discount rate, a lending rate to financial institutions, to 3.25 percent from 3.5 percent, effective immediately. The Fed also created another lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.
Japan's benchmark Nikkei 225 stock index plunged 4.2 percent to 11,727, while Hong Kong' Hang Seng index was down 4.4 percent at 21.263.51 after falling as much as 5 percent. The Korea Composite Stock Price Index in Seoul declined more than 3 percent. Markets in China, Australia, Indonesia, the Philippines and New Zealand also dropped.
The dollar also sank below 96 yen -- its lowest since at least September 1995.
U.S. stocks sank Friday after the announcement of a Fed plan in conjunction with JPMorgan Chase to alleviate the liquidity crisis at Bear Stearns touched off concerns about the severity of credit troubles in the world's largest economy. The Dow Jones industrial average fell 194.65, or 1.60 percent, to 11,951.09.
The Federal Reserve Expands Direct Borrowing
From Calculated Risk:
Fed Announces New Initiatives, by Calculated Risk: From the Federal Reserve:
The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.
First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.
Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.
The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.
This is along the lines of what I've been pushing for lately, though I'd like to see even more and I'd rather see asset trades instead of borrowing. But the Fed seems willing to extend credit or guarantee assets as needed, so now it's time to start pushing to get the mortgage repurchase plan Brad DeLong talked about in place, and to think about other stabilizing measures.
On the financing arrangements referenced in the statement, if you haven't heard:
JPMorgan buys Bear Stearns for $2 a share, FT: JPMorgan Chase on Sunday night agreed to buy Bear Stearns, the stricken US investment bank, for around $230m in shares in a deal that ... highlights the serious risks faced by banks during the credit crunch.
JPMorgan’s cut-price takeover of Bear, which has the backing of the Federal Reserve and the Treasury, was agreed before the opening of Asian markets on Monday morning in an attempt to stave off a run on other banks.
However, the deal, which values Bear at just $2 per share, compared with the $169 hit in January last year and the $30 reached on Friday, will wipe out the value of the investments of Bear’s shareholders including some of its senior management.
JPMorgan said that in addition to the emergency loans extended to Bear on Friday, the Fed had agreed to provide fund up of $30bn of Bear’s less liquid assets.
The rare arrangement significantly decreases JPMorgan’s risks and underlines the authorities’ concerns at the prospect of seeing one of the largest US investment banks go under.
The Federal Reserve and the Treasury feared that unless the Bear crisis was resolved promptly, there was an increased risk traders might turn their sights on other US and European banks.
“The Fed is most nervous about the systemic risk,” said one senior executive at Bear ... before the deal was announced “The government needs to stabilise the financial system.” ...
Updates: The WSJ Economics Blog has more on the expansion in direct borrowing and on the quarter percent cut in the discount rate.
Was it painless?:
More Lucky Duckies, by Atrios: Ouch.
Many well-known investors, from billionaire Joe Lewis to Bruce Sherman, the head of Legg Mason Inc.'s Private Capital Management Inc. money-management firm, have seen the value of their stakes in Bear Stearns plummet. The pain could be most acute for Bear Stearns's employees, who are steeped in a culture of personal ownership -- and hold about a third of the firm's shares outstanding.
Bear has over 14,000 employees.
Perhaps moreso than any other major investment securities firm, Bear promoted a culture of circled wagons, an us-against-the world camaraderie. As part of that effort, the investment bank paid a significant portion of its employees’ compensation in stock. On its Web site, Bear says that its employees own about one-third of the firm. That translates into about a $5.23 billion loss on paper for Bear’s employees over the last year, as the firm’s stock plunged 79.4 percent.
While presumably not evenly distributed across employees, that amounts to about $375K per employee.
Posted by Mark Thoma on Sunday, March 16, 2008 at 04:55 PM in Economics, Financial System, Monetary Policy
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Alan Greenspan: Models of Risk
The short version of this argument by Alan Greenspan is: models of risk are not perfect, they can miss inflating bubbles, so don't expect the Fed to know when a bubbling is inflating or to predict when a bubble might burst. And even if the Fed could identify bubbles, it couldn't stop them since a bubble "will not collapse until the speculative fever breaks on its own." The subtext is: don't blame me for missing the bubble that created the current mess, even if I did recognize it I couldn't have stopped it, and don't use the current crisis as an excuse to limit "market flexibility and open competition" through regulatory responses:
We will never have a perfect model of risk, by Alan Greenspan, Commentary, Financial Times: The current financial crisis in the US is likely to be judged ... as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise... Although inventories of vacant single-family homes ... have recently peaked, until liquidation of these inventories proceeds in earnest, the level at which home prices will stabilise remains problematic. ...
Home prices have been receding rapidly under the weight of ... inventory overhang. ... The level of home prices will probably stabilise as soon as the rate of inventory liquidation reaches its maximum... That point, however, is still an indeterminate number of months in the future.
The crisis will leave many casualties. Particularly hard hit will be much of today’s financial risk-valuation system, significant parts of which failed under stress. ...
The problems, at least in the early stages of this crisis, were most pronounced among banks whose regulatory oversight has been elaborate for years. To be sure, the systems of setting bank capital requirements ... will be overhauled substantially... Also being questioned, tangentially, are the mathematically elegant economic forecasting models that once again have been unable to anticipate a financial crisis or the onset of recession.
Posted by Mark Thoma on Sunday, March 16, 2008 at 02:26 PM in Economics, Financial System, Monetary Policy
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Arbitrary Coherence
How do we decide if something is worth purchasing?:
Shhh . . . Don't Say 'Recession,' by Dan Ariely, Commentary, Washington Post: ...[Could] current talk about a recession ... actually be creating one? Well, maybe. Or so one general finding of behavioral economics would have us believe.
With all this chatter about a recession, consumers might, for example, hold off on buying that new dishwasher because of the "bad economy," or pass up the more expensive restaurant because "we're in a recession."...
Consider the experience of eating a Godiva truffle... Now think about ... how much it's worth to you. A quarter? 50¢? 75¢? $1.25? $2.50? While the experience of eating a truffle is very familiar, figuring out what we would be willing to pay for it proves difficult. So what do we do when we make purchasing decisions? Generally, we use past decisions as a guiding principle. If we have paid 50¢ for a Godiva truffle in the past, we remember this decision, assume it was a good one and probably repeat it again and again. ...
What ...[does this show]? The existence of what we called arbitrary coherence. The basic idea of arbitrary coherence is this: Although initial prices can be "arbitrary," once those prices are established in our minds, they will shape not only present prices but also future ones (thus making them "coherent").
So would thinking about one's Social Security number be enough to create an anchor? ... That's what we wanted to find out. ...
Prelec ... passed out forms... "Now I want you to write the last two digits of your Social Security number at the top of the page," he instructed. "And then write them again next to each of the items in the form of a price. In other words, if the last two digits are 23, write $23."
"Now when you're finished with that," he added, "I want you to indicate on your sheets whether you would pay that amount for each of the products."
When the students had finished, Prelec asked them to write down the maximum amount they were willing to pay for each of the products (their bids). ... The students enjoyed this exercise, but when I asked them whether they felt that writing down the last two digits of their Social Security numbers had influenced their final bids, they dismissed my suggestion. No way! ...
Did the digits from the Social Security numbers serve as anchors? Remarkably, they did: The students with the highest-ending Social Security digits bid highest, while those with the lowest-ending numbers bid lowest. The top 20 percent, for instance, bid an average of $56 for the cordless keyboard; the bottom 20 percent bid an average of $16. In the end, students with Social Security numbers ending in the upper 20 percent placed bids that were 216 to 346 percent higher than those of the students with Social Security numbers ending in the lowest 20 percent. ...
Social Security numbers were the anchor in this experiment only because we requested them. We could just as well have asked for the current temperature, or your shoe size. Any question, in fact, would have created the anchor.
Does that seem rational? Of course not. But when we make one decision, even when it's about an arbitrary number, we bring this history into our future decisions, and continue to make the same decisions over and over without going back and questioning their wisdom.
This suggests that if we just ignored the talk about recession, we would repeat our past behaviors and not deviate much from our pre-recession pattern of purchasing decisions. But when everyone is talking about recession, it's likely to make us stop, rethink our past decisions and feel that something needs to change. And so we change our patterns, start acting as if we're in a recession -- and thereby create one. ...
I wonder if this could generate sticky prices. If the anchor price is the price people are hearing about in local markets rather than the price consistent with the fundamental (long-run equilibrium) value, it would be more difficult for prices to return to equilibrium since people would be unwilling to depart from recent average prices even if the fundamental value is quite a bit different. A "good deal" would be assessed relative to average prices or prices people are hearing about rather than relative to the true value. Thus, I see this mechanism more as a way to propagate departures from equilibrium (i.e. this would make business cycles longer and perhaps more severe) than a fundamental driving force behind the departures from equilibrium. It's possible to imagine this mechanism creating a business cycle through self-fulfilling expectations - people believe a recession is coming so they begin to cut back on consumption and investment causing the problem they are worried about. But in, say, the case of the housing market bubble I would be unwilling to say this type of behavior is the driving force that caused the problem, but quite willing to acknowledge that something like this could create the sluggish adjustment we see in housing markets in response to other types of large, disruptive shocks.
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