What's Next?

Investment Bank Collapses,

Gets Bailed Out By The Feds and Another Investment Bank,

US Economy Remains Surprisingly Robust,

Clearly Due To Favoritism By Jesus.

Okay, so Bear Stearns was drunk and stoned beyond belief, and became (and still is) ready to die, and JP Morgan grabs the nearly lifeless body for a song, hauls it into their hospital, and gets ready to either resuscitate it and skinny it down, or start selling off parts and organs to the black market.

Either way, the old body is gone, and the new one presents a cautionary tale that we can all learn from:

Don't party hard around the Federal Reserve or JP Morgan, or you might wake up without your spleen.

So now we have to understand that the reason Bear Stearns was bailed out, bullied and bought cheap, was the amount of certain derivitaves they carried on their books - specifically Credit Default Swaps - which are basically a form of compex insurance against the possibility of some of the other investments they made going bad - - -Bear Stearns had Credit Default Swaps totalling:

$2.5 TRILLION DOLLARS WORTH !

And Credit Default Swaps are only ONE type of complex financial investment they have.

These complex investments have not been around long enough to really know what they will do in times of market major corrections or crisis.

These vastly complicated financial instruments are all together called:

DERIVATIVES.

There are many types of Derivatives, of which, as I mentioned, Credit Defaulty Swaps are only ONE.

That is important for this reason:

The amount of just Credit Default Swaps held by all investment banks, etc., in 2001 totalled:

$900 BILLION DOLLARS.

Now all the Credit Default Swaps currently held by investment banks and other financial businesses total:

$44.5 TRILLION DOLLARS

And this is important when you compare it to the size of the Entire US Economy annually:

$14.5 TRILLION DOLLARS

This means that the size of only this ONE derivative held by all the banks, investment banks and hedge funds, is

THREE (3 !!!) TIMES BIGGER

THAN THE ENTIRE US ECONOMY !

And Did I Mention, No One Knows What Any Of These Derivatives Will Do In A Big Market Downturn, Or How They Will Affect Anything Else In The Economy?

Warren Buffett, the Sage of Stock Investing, the Oracle of Omaha, the new Richest Guy In The World, famously said several years ago that derivatives are,

"Potential Weapons Of Mass Destruction."

So the Federal Reserve, the Bush Administration, and Wall Street pretty much had to act to save Bear Stearns (a private investment bank, which the government does not regulate and has never before acted to save in times of trouble).

They had to do so because no one knew, nor still knows, what would happen if they did what they have almost always done with struggling businesses before - just let it fail, and let the capitalist market forces do their job.

The weak business fail and die, the strong businesses survive and thrive.

We say that, though the truth is not always that way, because sometimes the government does step in and rescue a business that is believed to be vital to the US economy or national security in some way - so banks, airlines, certain corporations, etc have sometimes been rescued, sometimes been left to die.

Maybe it also depends on how powerful your lobbyists are.

The Feds also acted faster than they had ever before when faced with a collapsing commercial bank, (the type of financial institution which they do regulate and they have generally previously rescued, since the Depression at least, when they learned the wisdom of doing so).

- - -

What does all this mean?

If Bear Stearns were allowed to fail, holding $2.5 TRILLION in Credit Default Swas, plus Who Knows How Much More in other types of Derivatives,

NO ONE KNOWS WHAT WOULD HAPPEN.

Seriously.

That $2.5 Trillion alone could have possibly started a domino-effect and brought down other financial institutions connected to Bear Stearns in any of the numerous types of derivatives investments...

It could have taken down other private investment banks, public commercial banks, bond companies, reincurance companies, hedge funds, and who knows what else.

But exactly what would be the result is completely unknown.

COMPLETELY UNKNOWN.

And the fear of the unknown sometimes creates desperation, and can lead to decisions that will turn out to be either brilliant or retarded.

We won't know which this was for some time...maybe as much as a year or a year and a half.

In the meantime, stay tuned...
same Bat time, same Bat channel, for the next episode of:

"The US Economic Demolition Derby"