In the new issue of Time (with the Dalai Lama on the cover) is my attempt at explaining the Credit Crisis/The Big Unwind/Jenga to millions of people with better things to do than read the FT and WSJ:
It was, no question, one of the most dramatic episodes in American financial history. A famously scrappy Wall Street investment bank, Bear Stearns, went from seemingly healthy to dead meat in about five days. Federal Reserve Chairman Ben Bernanke, desperate to avoid a sudden collapse that might cause a full-fledged market panic, invoked a little-known 1930s legal provision to engineer a Sunday fire sale of Bear Stearns to banking giant JPMorgan Chase for a mere $2 a share. (Bear’s stock price was $57 a week before, $171.51 in early 2007.)
With Bear shareholders virtually wiped out, half the firm’s employees slated to lose their jobs and no golden parachutes offered to the top executives, it wasn’t a bailout. But it did take a $30 billion loan from the Fed to seal the deal. This was a truly extraordinary use of the central bank’s powers and an indication that the subprime-mortgage crisis that erupted last summer has evolved into something bigger and more ominous–possibly the greatest challenge to the American way of financial capitalism since the Depression.
The immediate market reaction to the deal–and to the three-quarter-point interest-rate cut announced by the Fed two days later–was positive. Stocks rose nearly 4%; credit markets calmed a bit; the global financial system lived to fret another day. And fret it surely will, for the troubles that mauled Bear are far from over. Read more.