Miracles and Bear Stearns

C. Ewing asks

"Why is it required that saints perform miracles?"

They draft Archie Manning, Ricky Jackson, and Reggie Bush and still don't have a Super Bowl win, and you have to ask?

It wasn't always so. At first, sainthood was just a matter of being popular enough after death (usually as a result of being martyred), but eventually the naming of saints became institutionalized and rules put in place. A miracle guarantees a special relationship with the Divine. Being able to bring about the miraculous means that you are a special agent of God (a G-man). If you don't have God's cell phone number, you don't get the status; and you have to be able to prove that you can page the Big Guy because matters of religious importance are not the sort of thing you take on faith.

Jeff Maynes asks,

"How and why did Bear Stearns collapse?"

Bear Sterns is an investment firm that survived the Great Depression, but just got taken out. On the verge of collapse, they were sold for pennies on the dollar to J.P. Morgan with the backing of the Federal Reserve. What happened?

The short version:

The long version: Back in the 90s, when internet companies first starting popping up, technology speculation created a lot of wealth on paper. Stocks were going through the roof because of increased demand from (a) baby boomers starting to save in earnest for retirement, and (b) speculators seeing the markets going up, up, up. But the high prices were just the result of irrational demand and when there was found to be no there there, that bubble burst.

Soon followed 9/11, and the economy as a whole was a bit shaky. So interest rates were lowered to try to spur growth. These low interest rates meant that people who could afford $X a month in mortgage could buy a larger house than they otherwise thought they could and many did. The one spot in the economy that was doing well was housing. Prices were going up, up, up, and so people were putting lots of money into real estate. Flipping houses (buying it, waiting a short period of time and then selling it for more money) seemed to guarantee significant profits. House prices would keep going up, so lenders made riskier and riskier loans to people who were not good candidates because if they defaulted, then the bank would get the house, the value of which would have gone up and they'd get more money flipping it themselves. It was a no lose proposition. They made money either way.

But then interest rates were raised because oil prices were going through the roof (Katrina, the war in Iraq) and this meant that the price of everything goes up because everything has to be shipped from somewhere to somewhere. This means inflation and to slow the growth of inflation, you increase the price for money to slow things down and let them cool off. But the loans that people had taken out on their homes were largely adjustable rate mortgages (ARMs) and when the interest rate goes up, their monthly payment goes up -- above what they could afford. As a result many, many people began to default on their mortgages, unable to make the payments because wages have been stagnant, but costs of everything are going up, compounded by a huge leap in their monthly mortgage payment that they had not seen coming.

As a result of these houses flooding the market and higher interest rates making larger houses less attractive, there were many fewer people looking for homes. Less demand means the artificially high prices that had bubbled up couldn't be supported. Now, the prices of houses are dropping. No one wants to sell at a lower price, and no one wants to buy until the price bottoms out. So the whole market collapses leaving those who made the risky loans having to lose money on the investment or take a house they can't sell either.

So, where is Bear Stearns in this mess? They were an investment house known for their aggressive tactics. They had two large hedge funds -- hyper-aggressive investors who made gigantic sums for their clients quickly -- that, during the high times, would purchase these mortgages from the lenders, big bundles of them. The lender therefore made their profit up front, while the fund now had a guaranteed money maker. They would buy a bundle of mortgages that would bring in say $X over thirty years years for much less than $X, they then could put this profit which they hadn't yet collected on their books and use it as funds to buy more bundles of mortgages which gave them more funds (that they just didn't have yet) to buy more bundles... When the bottom fell out of the market, their house of cards came tumbling down and then the Bear Stearns investors who had been the ones to buy into the scam and provide them with the money, started to rapidly pull out what was left, but since the money was tied up in the bad investments, they didn't have it to pay out. So, you got the equivalent of a run on a bank.

The government was afraid this run would spread since pretty much all of the big financial institutions were doing similar things on some scale and are all losing cash as a result. So they got J.P. Morgan to buy Bear Stearns at a deep discount and assume the bad debt by guaranteeing it with tax dollars. The idea was to put a band-aid on it and hope that other investors didn't flee from other investment houses since the whole thing is kept up by confidence and if a general panic started, we're looking at Great Depression mark II. It seems to have worked in the short term, but what awaits in the next few years?...