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What lurks behind Bear Stearns bailout?

Published Apr 10, 2008 1:17 AM

The banks are made of marble
With a guard at every door
And the vaults are stuffed with silver
That the workers sweated for

—Folk song by Les Rice

The week of March 10, the fourth-largest U.S. investment bank, Bear Stearns, collapsed. Panic-stricken investors, shareholders, employees and other creditors simultaneously demanded their money in a run on the bank, which had become the second-largest trader in speculative financial instruments.

Fear of a capitalist meltdown spread through the financial markets. Giant commercial banks CitiGroup, Bank of America and Wachovia, plus investment banks Lehman Brothers, Merrill Lynch and a host of others, were also swept up in a tsunami of risky investments. All were flooded with subprime mortgages, faulty structured investment vehicles, opaque credit default swaps and other over-valued financial instruments. They were forced to write down hundreds of billions in losses.

Britain’s Northern Rock went belly up, forcing the government to pick up the pieces. Swiss bank UBS, Germany’s Deutsche Bank and other European banks were also caught up in the whirlpool of risky financial instruments.

Was this the beginning of a 1929 meltdown? Or would bailing out the banks avoid a crash?

On the weekend of March 14-16, the leaders of the Federal Reserve Board and the government met in all-night sessions, panicked and fearful of a financial meltdown. Most important, JPMorgan Chase, one of the most powerful banking conglomerates in the world, was invited to join the conclave. It became the key player, dominating the negotiations and demanding big-time collateral and guarantees to buy out Bear Stearns and alleviate the fears of Wall Street.

Federal Reserve Board chair Ben Bernanke and President Timothy Geithner of the New York Federal Reserve, architects of the Bear Stearns bailout, were soon called before the Senate Finance Committee. They “compared the turmoil that weekend to the Panic of 1907 and the Great Depression-era run on banks.” (Bloomberg.com, April 4)

JPMorgan Chase is an amalgam of the infamous banking houses of Morgan and Rockefeller, widely heralded as the robber barons of yesteryear. They built empires of high finance off the blood, sweat and tears of mainly immigrant labor.

J. P. Morgan began his career by selling defective rifles to the government during the Civil War. He parlayed those profits into railroads built on stolen public land, and proceeded to build giant steel mills on the bones of small entrepreneurs.

John D. Rockefeller made his start in big oil by blowing up small rival oil operations, then expanding into mining and real estate. JP and JD came to dominate other monopolistic industries like auto and finance.

Both empires provoked wars abroad to consolidate their wealth, ruthlessly fought unions and brutalized workers, and created company towns and stores that kept workers in a constant state of debt and poverty.

Fed blesses Morgan buyout

In January, Bear Stearns stock had traded at $171 a share. By March, Jamie Dimon, head of JPMorgan Chase, saw a chance to steal this 85-year-old Wall Street dynasty at $2 a share. Although the price was later raised to $10, Bear Stearns shareholders and employees were totally wiped out.

For a pittance, JPMorgan acquired $1.2 billion in prime midtown property along with Bear Stearns’ premier assets. It arrogantly refused to take over most of the risky financial instruments, forcing the Fed, and eventually the worker/taxpayer, to assume that liability. The Fed blessed JPMorgan with a $29 billion credit line.

The swindle was worked out in secret meetings among powerful Wall Street players and led by the Fed, regulator of more than a thousand banks associated with the system. The government was represented by the Treasury Department, the Securities and Exchange Commission, the Comptroller of the Currency and other governmental agencies. These are the movers and shakers that influence the stock market.

Following this financial coup, the Dow Jones average of industrial stocks climbed nearly 400 points. For the next few days the market elites were claiming the capitalist crisis was over.

Although the stock market is an integrated sector of the financial services industry, it is also the most prominent representative of capitalist production. All industry, agriculture, commerce and the means of production pass through the hands of stock exchange operators.

Workers bear the burden

When Fed chair Bernanke, savior of banking institutions, finally used the “R” word—for recession, no news to broad sectors of the working class—it was a confirmation that the financial crisis had drawn in the broader capitalist economy. In March 80,000 jobs were officially lost and the unemployment rate rose to 5.1 percent. However, these figures understate the extent of the assault on the workers and oppressed, who have lost more than 10 million jobs since the “jobless recovery” of 2001.

Increasingly, the workers and oppressed are faced with hard choices. Pay for gas to get to work? Stint on groceries? Pay the mortgage or the rent? Or buy the prescriptions? They have seen pensions disappear and wages sunk by hyperinflation—an enormous leap in the cost of staying alive. And the economy continues to stagnate.

One factor in rising inflation is the flood of money printed by the government, which is sinking the dollar. Others are the stoking of the war in Iraq and Afghanistan and the growing fear over the unprecedented debt and the credit crunch. “The Federal Reserve and other global central banks have been hosing the world with new money in their efforts to avoid a financial crisis.... The cheap money didn’t stop a Wall Street bank run—it was the Fed’s bold plan to absorb subprime debt that did that—but it may add fuel to the inflation fire,” warned the Washington Post on April 3.

Multibillionaire George Soros, a prominent Wall Street global investor, says a super-bubble is growing in the commodities markets. (“Wall Street Journal,” NBC-TV, April 6) Rising prices in metals, food, energy, services and a host of other staples are fueling hyperinflation, while the subprime housing crisis has yet to reach bottom. Is Soros talking about another 1929 crash?

A debate is going on within the ruling class—is the economy in a short-lived cyclical recession or will there be a capitalist economic crash?

The extreme volatility and sharp ups and downs in the stock market reflect the debate.

A similar discussion took place in the latter part of the golden 1920s. The argument was settled by the devastating 1929 stock market crash, which led to the Great Depression of the 1930s.

Missing from the debate are the fundamental and material interests of the masses. There is an absolute necessity for an independent, class-wide, massive wave of demands, programs and strategies emanating from the needs of workers, the oppressed and their organizations. Radicalization of the multinational working class is inevitable. A struggle against the banks, the financial institutions, corporate monopolies and their stooges in government will be a good beginning.