Bear Stearns and the mob

How much is Bear Stearns worth? Last time I checked, JP Morgan was paying 10 dollars a share, but only after the Fed agreed to provide a number of taxpayer-funded goodies to make it worth for the good bankers at J to the P to take the plunge.

The value of these goodies easily runs to plenty of times 10$ a share, which places the social value of Bear Stearns in solid red territory. Yet it still makes sense for the taxpayer to fund this deal, and to compensate Bear shareholders for being such bloody fools. Bear Stearns can't fail, as it will take the entire banking system and the 'real economy' with it.

This would never (well, almost never) happen with, say, a steelmaker or software company of similar size. That's why banks are not, and cannot, be plc's in the same way that other companies are. The social value of a steelmaker can only fall as far down as zero, while the social value of a bank can be much, much lower than that.

Failing banks are in many ways similar to the mob: not offering anything useful to anyone other than themselves, but having such ability to cause trouble that it makes sense to give them money simply to avoid the worst.

With the mob, local businessmen and residents pay the price. With banks, this is the job of the taxpayer.

by datacharmer | Tuesday, April 15, 2008
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