Opera Buffa: JPM Raises Bid for 39.5% of BSC to $10

JP Morgan Increases its offer on Bear Stearns to $10
but for a Minority Share
L'Opera Buffa On Wall Street

It is reported this morning that JP Morgan Chase is increasing its offer to buy Bear Stearns to $10 per share, but will only be buying 39.5% of the company.

In an amended deal, JP Morgan Chase will also be risking 1 billion dollars in losses in Bear Stearns.

The Federal Reserve (the public aka all holders of US dollars) will be taking the risk on the next $29 billion.

Without the Fed's guarantee, Bear Stearns would be in receivership todaywith the shares worth 'zero.' This is Aid to Dependent Pigmen.

Moral hazard reaches comedic proportions.

Text of Revised JPM-BSC Deal
March 24, 2008 10:02 a.m.
JPMorgan Chase and Bear Stearns Announce Amended Merger Agreement
and Agreement for JPMorgan Chase to Purchase 39.5% of Bear Stearns

NEW YORK-- March 24, 2008--

JPMorgan Chase & Co. (NYSE: JPM)
and The Bear Stearns Companies Inc. (NYSE: BSC) announced an amended merger agreement regarding JPMorgan Chase's acquisition of Bear Stearns.

Under the revised terms, each share of Bear Stearns common stock would be exchanged for 0.21753 shares of JPMorgan Chase common stock (up from 0.05473 shares), reflecting an implied value of approximately $10 per share of Bear Stearns common stock based on the closing price of JPMorgan Chase common stock on the New York Stock Exchange on March 20, 2008.

In addition, JPMorgan Chase and Bear Stearns entered into a share purchase agreement under which JPMorgan Chase will purchase 95 million newly issued shares of Bear Stearns common stock, or 39.5% of the outstanding Bear Stearns common stock after giving effect to the issuance, at the same price as provided in the amended merger agreement. As discussed below, the purchase of the 95 million shares is expected to be completed on or about April 8, 2008.

The Boards of Directors of both companies have approved the amended agreement and the purchase agreement. All of the members of the Bear Stearns Board of Directors have indicated that they intend to vote their shares held as of the record date in favor of the merger.

The JPMorgan Chase guaranty of Bear Stearns' trading obligations has also been significantly clarified and expanded. For more information, the guaranty agreement will be filed publicly and the parties will provide a Question and Answer document describing the guaranty in further detail on their respective websites. JPMorgan Chase has also agreed to guarantee Bear Stearns' borrowings from the Federal Reserve Bank of New York.

The Federal Reserve Bank of New York's $30 billion special financing associated with the transaction has also been amended so that JPMorgan Chase will bear the first $1
billion of any losses associated with the Bear Stearns assets being financed and the Fed will fund the remaining $29 billion on a non-recourse basis to JPMorgan Chase.

"We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, "and bring more certainty for our respective shareholders, clients, and the marketplace. We look forward to a prompt closing and being able to operate as one company."

"Our Board of Directors believes that the amended terms provide both significantly greater value to our shareholders, many of whom are Bear Stearns employees, and enhanced coverage and certainty for our customers, counterparties, and lenders," said Alan Schwartz, President and Chief Executive Officer of Bear Stearns. "The substantial share issuance to JPMorgan Chase was a necessary condition to obtain the full set of amended terms, which in turn, were essential to maintaining Bear Stearns' financial stability."

While the rules of the New York Stock Exchange (NYSE) generally require shareholder approval prior to the issuance of securities that are convertible into more than 20% of the outstanding shares of a listed company, the NYSE's Shareholder Approval Policy provides an exception in cases where the delay involved in securing shareholder approval for the issuance would seriously jeopardize the financial viability of the listed company.

In accordance with the NYSE rule providing that exception, the Audit Committee of Bear Stearns' Board of Directors has expressly approved, and the full Board of Directors has unanimously concurred with, Bear Stearns' intended use of the exception. The closing of the sale of the 95 million shares is expected to be completed upon the conclusion of a shareholder notice period required by the NYSE, which is expected to occur on or about April 8, 2008.

Which Way Out of the Minsky Moment?

If we are indeed in a Minsky Moment, which we think we are, then monetary inflation by the Fed and government invervention without reform will most likely increase the probability of a protracted stagflationary repression in the United States, and possibly lead to civil unrest and an exogenous reform of the system. An abandonment of the system as it is with a turn to fascism has been the historic choice of Wall Street. The political lobbying against systemic reform by the Bankers and their sycophants will be intense and as persuasive to the many as most appeals to fear. However, their reckless advice leads to a trip to the brink of the abyss.

The Minsky Moment
by John Cassidy
February 4, 2008
The New Yorker

Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

Many of Minsky’s colleagues regarded his financial-instability hypothesis, which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting. In trying to revive the economy, President Bush and the House have already agreed on the outlines of a “stimulus package,” but the first stage in curing any malady is making a correct diagnosis.

Minsky, who died in 1996, at the age of seventy-seven, earned a Ph.D. from Harvard and taught at Brown, Berkeley, and Washington University. He didn’t have anything against financial institutions—for many years, he served as a director of the Mark Twain Bank, in St. Louis—but he knew more about how they worked than most deskbound economists. There are basically five stages in Minsky’s model of the credit cycle: displacement, boom, euphoria, profit taking, and panic. A displacement occurs when investors get excited about something—an invention, such as the Internet, or a war, or an abrupt change of economic policy. The current cycle began in 2003, with the Fed chief Alan Greenspan’s decision to reduce short-term interest rates to one per cent, and an unexpected influx of foreign money, particularly Chinese money, into U.S. Treasury bonds. With the cost of borrowing—mortgage rates, in particular—at historic lows, a speculative real-estate boom quickly developed that was much bigger, in terms of over-all valuation, than the previous bubble in technology stocks.

As a boom leads to euphoria, Minsky said, banks and other commercial lenders extend credit to ever more dubious borrowers, often creating new financial instruments to do the job. During the nineteen-eighties, junk bonds played that role. More recently, it was the securitization of mortgages, which enabled banks to provide home loans without worrying if they would ever be repaid. (Investors who bought the newfangled securities would be left to deal with any defaults.) Then, at the top of the market (in this case, mid-2006), some smart traders start to cash in their profits.

The onset of panic is usually heralded by a dramatic effect: in July, two Bear Stearns hedge funds that had invested heavily in mortgage securities collapsed. Six months and four interest-rate cuts later, Ben Bernanke and his colleagues at the Fed are struggling to contain the bust. Despite last week’s rebound, the outlook remains grim. According to Dean Baker, the co-director of the Center for Economic and Policy Research, average house prices are falling nationwide at an annual rate of more than ten per cent, something not seen since before the Second World War. This means that American households are getting poorer at a rate of more than two trillion dollars a year.

It’s hard to say exactly how falling house prices will affect the economy, but recent computer simulations carried out by Frederic Mishkin, a governor at the Fed, suggest that, for every dollar the typical American family’s housing wealth drops in a year, that family may cut its spending by up to seven cents. Nationwide, that adds up to roughly a hundred and fifty-five billion dollars, which is bigger than President Bush’s stimulus package. And it doesn’t take into account plunging stock prices, collapsing confidence, and the belated imposition of tighter lending practices—all of which will further restrict economic activity.

In an election year, politicians can’t be expected to acknowledge their powerlessness. Nonetheless, it was disheartening to see the Republicans exploiting the current crisis to try to make the President’s tax cuts permanent, and the Democrats attempting to pin the economic downturn on the White House. For once, Bush is not to blame. His tax cuts were irresponsible and callously regressive, but they didn’t play a significant role in the housing bubble.

If anybody is at fault it is Greenspan, who kept interest rates too low for too long and ignored warnings, some from his own colleagues, about what was happening in the mortgage market. But he wasn’t the only one. Between 2003 and 2007, most Americans didn’t want to hear about the downside of funds that invest in mortgage-backed securities, or of mortgages that allow lenders to make monthly payments so low that their loan balances sometimes increase. They were busy wondering how much their neighbors had made selling their apartment, scouting real-estate Web sites and going to open houses, and calling up Washington Mutual or Countrywide to see if they could get another home-equity loan. That’s the nature of speculative manias: eventually, they draw in almost all of us.

You might think that the best solution is to prevent manias from developing at all, but that requires vigilance. Since the nineteen-eighties, Congress and the executive branch have been conspiring to weaken federal supervision of Wall Street. Perhaps the most fateful step came when, during the Clinton Administration, Greenspan and Robert Rubin, then the Treasury Secretary, championed the abolition of the Glass-Steagall Act of 1933, which was meant to prevent a recurrence of the rampant speculation that preceded the Depression.

The greatest need is for intellectual reappraisal, and a good place to begin is with a statement from a paper co-authored by Minsky that “apt intervention and institutional structures are necessary for market economies to be successful.” Rather than waging old debates about tax cuts versus spending increases, policymakers ought to be discussing how to reform the financial system so that it serves the rest of the economy, instead of feeding off it and destabilizing it. Among the problems at hand: how to restructure Wall Street remuneration packages that encourage excessive risk-taking; restrict irresponsible lending without shutting out creditworthy borrowers; help victims of predatory practices without bailing out irresponsible lenders; and hold ratings agencies accountable for their assessments. These are complex issues, with few easy solutions, but that’s what makes them interesting. As Minsky believed, “Economies evolve, and so, too, must economic policy.” ♦


In Time of Tumult,Obscure Economist Gains Currency
Mr. Minsky Long Argued Markets Were Crisis Prone;
His 'Moment' Has Arrived
By JUSTIN LAHART
August 18, 2007

At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote.

When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash [that can force central bankers to lend a hand]. At that point, the Minsky moment has arrived.

The worst of all worlds would be a stagflationary depression in which unemployment was high, wages were stagnant for the majority, and the price of essentials spiraled higher despite slack aggregate demand.

The Financial Instability Hypothesis by Hyman Minsky May 1992

An increasing complexity of the financial structure, in connection with a greater involvement of governments as refinancing agents for financial institutions as well as ordinary business firms (both of which are marked characteristics of the modern world), may make the system behave differently than in earlier eras. In particular, the much greater participation of national governments in assuring that finance does not degenerate as in the 1929-1933 period means that the down side vulnerability of aggregate profit flows has been much diminished. However, the same interventions may well induce a greater degree of upside (i.e. inflationary) bias to the economy.

It is our view that the only sustainable exit from this boom-bust cycle will be a systemic reform of the banking system so that it once again serves the real economy, and a return to the growth of real wages and a more equitable distribution of wealth in the country to foster aggregate savings and sustainable consumption.

Moral Hazard

Moral hazard is the probability that a party insulated from risk will behave differently from the way they would behave if fully exposed to the risk.  Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act with increasing recklessness, literally 'without reckoning.'  It also encourages the rise to power of sociopaths in society as a whole.

It is difficult to explain moral hazard to tenured professors or the pampered princes of bureaucracy, who beat the drum with their silver spoons in support of shifting the risk of loss to the public every time that Wall Street falls into one of its own schemes and blows itself up.

It is a lesson that the average person learns by the age of twelve and relearns, sometimes spectacularly, at least once in young adulthood.  If you do something wrong there can be bad outcomes, and you will pay the price and penalty.  Unfortunately there is a small but powerful oligarchy of privilege that is trying to project themselves onto the global stage while believing that they are immune to ordinary consequence, and have become addicted to the notion that 'others must pay' for their failures.

Moral hazard comes from rewarding bad behaviour in markets with wristslaps and bailouts. It is a danger to the economy and to the public.

Now we might expect even more brazen attempts to game the system. This inevitably leads to wild gyrations in stocks and bonds and commodities.  History suggests ever more brazen price manipulation so disconnected from reality that actual physical shortages result because of the corruption of the market pricing mechanism.

Can't happen? Enron made it happen in the energy markets, and almost brought California, a state the size of most countries, to its knees.

The wristslaps and bailouts will continue until these modern maestros kill themselves or someone else, and create damage too great to be bought off in the backrooms of the county courthouse.

At least their descent from the heights will be impressive, if you can avoid the impact crater.


AP
Wall Street Culture Not Likely to ChangeSaturday March 22, 7:05 am ET
By Joe Bel Bruno

Culture of Risk on Wall Street Not Seen Changing Amid Bear Stearns Downfall

NEW YORK (AP) -- Wall Street investment bankers got another lesson about the dangers of risk-taking this past week with the downfall of Bear Stearns Cos. The question now obviously is, how long will it last?

Those bankers, many of whom lived through market debacles like the dot-com bust at the start of this decade, turned out to have very short memories. And so analysts believe the sale of Bear Stearns to JPMorgan Chase & Co. for a stunning $2 per share ultimately won't have that much of an impact on how Wall Street conducts business.

In fact, bankers and traders are under even more pressure to reap big returns because of the ongoing credit crisis, and risk is just part of the game.

"There's an old saying on Wall Street that, for traders and bankers, you'd have to take a normal 30 year career and distill it to 15 years," said Quincy Krosby, chief investment strategist for The Hartford. "This whole episode might change Wall Street for a little while."

Krosby believes that Bear Stearns' near-collapse, which followed the company's investing too heavily in risky mortgage-backed securities, might force some bankers to change their ways in the short term. But it won't be enough to temper the financial industry's relentless pursuit of money.

Indeed, the past decade has seen a number of investing fiascoes that Wall Street doesn't appear to have learned much from. Krosby noted the go-go Internet days -- when untested high-tech companies reaped piles of cash in public offerings. The lesson then was, don't put a lot of money into a venture that isn't on fairly solid ground -- but mortgages granted to people with poor credit are quite akin to high-tech firms that had never turned a profit. In both cases, investors gleefully looked past the risk.

Now investors are smarting from what happened to Bear Stearns. And traders are somewhat chastened, for now.

Erin Callan, the chief financial officer for Lehman Brothers Holdings Inc., said her firm has certainly become more wary about the risks it takes amid the credit crisis. However, the market's gyrations also offer Lehman's army of traders an opportunity to make money.

"We just try to come in, and run the business the best way we can," she said. "But, you can't survive if you take no risks at all. All we can do is plan in this environment, making sure we do all the things to optimize running the firm."

It seems there's little that will change an industry and a lifestyle attached to Wall Street, which is thought of by Americans as more than just the center of free-market capitalism. Its culture attracts men and women with a swashbuckling mentality -- smart, aggressive risk takers with the potential to become very rich. (You could use the same description for conmen, gangsters and drug dealers - Jesse)
And, their skills in trading and investment banking were proven this past week -- even after news of Bear Stearns' buyout.

Chief executives at Morgan Stanley, Goldman Sachs Group Inc., and Lehman Brothers pointed out that trading desks played a big part in offsetting massive mortgage-backed asset write-downs, which have ticked past $156 billion for global banks since last year.


As the three companies released first-quarter earnings data, Morgan Stanley said equity trading revenue surged 51 percent to $3.3 billion. Revenue at its fixed-income sales and trading group dropped 15 percent to $2.9 billion, but it was still the firm's second-highest performance ever despite having to write down $2.3 billion linked to subprime mortgages and leveraged loans.

And that pleased investors. Morgan Stanley had its largest gain in more than a decade on Wednesday, climbing 18.8 percent to $42.86. Rival investment banks also had their best week since 2001.

But, investors shouldn't get too comfortable -- the investment banking industry, and Wall Street in general, still have a long way to go before they can be called healthy. It's not just the credit market problems that are an issue, it's also the struggling U.S. economy and its potential to hurt other countries.

"Until we feel more certain about the worldwide economies, we don't see things picking up dramatically," said Goldman Sachs CFO David Viniar. "We just need to keep plugging away."

S&P Cuts Investment Banks Outlook to 'Negative'

Goldman, Lehman Rating Outlook Cut to Negative by S&P - Bloomberg
By Zhao Yidi

March 21 (Bloomberg) -- Goldman Sachs Group Inc., the biggest U.S. securities firm, and smaller rival Lehman Brothers Holdings Inc. had their credit-rating outlook cut to negative by Standard & Poor's, which said Wall Street banks' profits may fall as much as 30 percent this year.

''Our current expectation is that net revenue could decline'' between 20 and 30 percent year-on-year for independent securities firms, S&P said in a statement today. S&P affirmed its long-term credit ratings for Goldman and Lehman. Both companies are based in New York.

The Federal Reserve's decision last week to open a lending facility for brokers and provide financial support for JPMorgan Chase & Co.'s emergency takeover of Bear Stearns Cos. ''mitigates liquidity concerns,'' S&P said. ''Nonetheless, we see some possibility, were there to be persisting capital markets turmoil and sharply weakening economic conditions, that financial performance could deteriorate significantly.''


Goldman, Lehman outlooks cut to 'negative' by S&P - Reuters
Fri Mar 21, 2008 11:19am EDT

NEW YORK, March 21 (Reuters) - Goldman Sachs Group Inc's and Lehman Brothers Holdings Inc's credit rating outlooks were cut on Friday to "negative" from "stable" by Standard & Poor's, which cited the potential for larger profit declines from capital markets activities.

S&P rates Goldman's long-term credit "AA-minus," its fourth-highest investment grade, and Lehman's "A-plus," its fifth highest. The outlook revision suggests conditions that may result in a downgrade within two years. Lower credit ratings can result in higher borrowing costs.

The credit rating agency said Goldman has been Wall Street's profit leader for several years and has very strong liquidity, but that its emphasis on trading and "aggressive" risk appetite expose it to potential for "major missteps."

Meanwhile, S&P said Lehman has a stable base of funding and strong fundamentals, but "could suffer severely if there was an adverse change in market perceptions, however ill-founded."

Goldman and Lehman representatives did not immediately return calls seeking comment.

Goldman is Wall Street's biggest bank by market value and Lehman is Wall Street's fourth largest bank.

S&P said volatile market conditions and this month's "virtual collapse" of Bear Stearns Cos highlight the exposure to vagaries in capital markets that Wall Street investment banks have.


The credit rating agency said net revenue may decline 20 percent to 30 percent this year for investment banks.

It warned that if market turmoil persists and the economy weakens sharply, then "financial performance could deteriorate significantly more than we now assume, which would call the current ratings into question."

Bear Stearns agreed on Sunday to be acquired by JP Morgan Chase & Co (for about $236 million, or $2 per share, nearly 99 percent less than it was worth a year earlier.

S&P also said it may still downgrade Morgan Stanley's "AA-minus" rating, while it retained a negative outlook on Merrill Lynch&Co's "A-plus" rating.

The Fed is Now Bailing Out COMMERCIAL Real Estate?

March 20, 2008

The Open Market Trading Desk of the Federal Reserve Bank of New York (“Desk”) has engaged in extensive consultation with market participants on the overall design and technical features of the Term Securities Lending Facility (“TSLF”) since it was announced on March 11, 2008. As a result of this consultative process, the Desk is announcing a few modifications to the previously released program terms and conditions, as well as providing more details on the parameters of the first auction, scheduled for Thursday, March 27, 2008 at 2:00 p.m. Eastern time.

The Desk will conduct the first TSLF auction on March 27. The offering size will be $75 billion for a term of 28 days.The first TSLF auction will be a loan of Treasury securities against Schedule 2 collateral rather than against the Schedule 1 collateral previously proposed.

To facilitate the operational processes of the facility, the Federal Reserve has also expanded the list of eligible collateral for Schedule 2 to include agency collateralized-mortgage obligations (CMOs) and AAA/Aaa-rated commercial mortgage-backed securities (CMBS), in addition to the previously announced AAA/Aaa-rated private-label residential mortgage backed securities (RMBS) and OMO-eligible collateral.

The minimum fee rate for the TSLF Schedule 1 and Schedule 2 auctions will be set at 10 basis points and 25 basis points, respectively, with the actual fee rate resulting from the TSLF single-price auction format. The auction-determined lending fee rate should be approximately equal to the spread between the Treasury general collateral rate and the general collateral rate for the pledged collateral over the term of the loan.On Wednesday, April 2, the Desk will announce the size and the Schedule of eligible collateral for the second auction to be held on April 3. The size and Schedule of eligible collateral of all future auctions will be based upon the Desk’s assessment of auction demand, as well as on information gathered in ongoing discussions with market participants and prevailing funding market conditions. In total, the Desk has been authorized to lend up to $200 billion of Treasury securities through TSLF auctions.

US Dollar Long Term Chart - March 21, 2008

Hey Ben! What's in Your Wallet?

Technically that dollar in your pocket, a Federal Reserve Note, was debased this week.

Most people don't realize that the dollar is a unit of measure. There are dollars, and then there are those pieces of paper you may have called Federal Reserve Notes. They are IOUs from a private bank called the Federal Reserve. They are usually backed, or collateralized, by 100% US guaranteed debt, Treasuries and select agencies like Ginnie Mae (and not pseudo-guaranteed agencies like Fannie and Freddie).

Did we just witness an historic first this week? Did the Federal Reserve Note just get debased by about fourteen percent? Is a portion of the Federal Reserve Note now backed by the private and illiquid obligations of Wall Street?

Here is an excerpt from the Fed's Balance Sheet that comes out in the H.41 report every Thursday after the markets close.

Only 86% of Federal Reserve notes, rightfully IOUs from the Fed or Federal Reserve Notes, are still backed by AAA debt obligations.

There was quite a flash bang around Bear Stearns, the dollar and the metals this week. While we were distracted did Ben just cross the Rubicon by backing the FRN 'dollar' with junk? Treasuries are still Treasuries. Agencies are still agencies. But this ain't your daddy's dollar anymore. And certainly not your granddaddy's. We've taken a step almost as great as the loss of gold backing for the US dollar in circulation. Now it is not even backed by 100% AAA debt.

Welcome to interesting times.

And now even commercial real-estate is in there too.

2007-9 Bear Market Update: March 20

What Do You Think Mom and Dad Should Do About the Children?

Here is a simple explanation of the credit crisis by Steve Waldman over at Interfluidity that is quite interesting. Steve has an amazing site. We recommend it.

We have taken the liberty of adding our own twist at the end though. You decide what is the most effective thing to do.

Credit Crisis for Kindergartners

David Leonhardt notes that it's pretty hard to explain what's going on in the financial world these days. Here's how I'd tell the tale to a child:

Alice, Bob, and Sue have ten marbles between them. Whenever one kid wants another kid to take over a chore, she promises a marble in exchange. Alice doesn't like setting the table, so she promises Bob a marble if he will do it for her. Bob hates mowing the lawn, but Sue will do it for a marble. Sue doesn't like broccoli, but if she says pretty please and promises a marble, Bob will eat it off her plate when Mom isn't looking.

One day, the kids get together to brag about all the marbles they soon will have. It turns out that, between them, they are promised 40 marbles! Now that is pretty exciting. They've each promised to give away some marbles too, but they don't think about that, they can keep their promises later, after they've had time to play with what's coming. For now, each is eager to hold all the marbles they've been promised in their own hands, and to show off their collections to friends.

But then Alice, who is smart and foolish all at the same time, points out a curious fact. There are only 10 marbles! Sue says, "That cannot be. I have earned 20 marbles,
and I have only promised to give away three! There must be 17 just for me."

But there are still only 10 marbles.

Suddenly, when Bob doesn't want to mow the lawn, no one will do it for him, even if he promises two marbles for the job. No one will eat Sue's broccoli for her, even though everyone knows she is promised the most marbles of anyone, because no one believes she will ever see those 17 marbles she is always going on about. In fact, dinnertime is mayhem. Spoons are placed where forks should be, and saucers used for dinner plates, because Alice really is hopeless in the kitchen. Mom is cross. Dad is
cross. Everyone is cross. "But you promised," is heard over and over among the children, amidst lots of stomping and fighting. Until recently, theirs was such
a happy home, but now the lawn is overgrown, broccoli rots on mismatched saucers, and no one trusts anyone at all. It's all a bit mysterious to Dad, who points out that nothing has changed, really, so why on Earth is everything falling apart?

Perhaps Mom and Dad will decide that the best thing to do is just buy some more marbles, so that all the children can make good on their promises. But that would mean giving Alice 19 marbles, because she was laziest and made the most promises she couldn't keep, and that hardly seems like a good lesson. Plus, marbles are expensive, and everyone in the family would have to skip lunch for a week to settle Alice's debt. Perhaps the children could get together and decide that an unmet promise should be worth only a quarter of a marble, so that everyone is able to keep their promises after all. But then Sue, the hardest working, would feel really ripped off, as she ends up with a much more modest collection of marbles than she had expected. Perhaps Bob, the strongest, will simply take all the marbles from Alice and Sue, and make it clear than none will be given in return, and that will be that. Or, perhaps Alice and Bob could do Sue's chores for a while in addition to their own, extinguishing one promise per chore. But that's an awful lot of work, what if they just don't want to, who's gonna force them? What if they'd have to be in
servitude to Sue for years?

Almost whatever happens, the trading of chores, so crucial to the family's tidy lawns and pleasant dinners, will be curtailed for some time. Perhaps some trading will occur via exchange of actual marbles, but this will not be common, as even kids see the folly of giving rare glass to people known to welch on their promises. It makes more sense to horde.

A credit crisis arises when many more promises are made than can possibly be kept, and disputes emerge about how and to whom promises will be broken. It's less a matter of SIVs than ABCs.

As it turns out, this is only part of the story.

Alice, Bob and Sue have done this 'marble scam' several times in the past ten years. They are now in middle school. They graduated quickly from 'marbles' for each other's chores, and have been trading a wider range of items to the neighborhood children and their classmates. They have taken compact disk players, iPods, cell phones, expensive video game platforms, stereos, wide screen televisions, and all the latest gear which they have flaunted at school openly and brazenly. They were admired and touted by many as true examples of clever innovation and success in trading so many items and gaining so much material wealth for themselves, and the promised wealth for the other children.

But of course it was a scam, and they could not even begin to pay. Even after their deception was discovered, they continued to work their deals on other families in nearby towns. They are rumoured to have compromised or bribed several teachers at school where they conducted much of their operations. Alice even helped set up a trap for the assistant principal which ruined him.

They don't think they should have to give ANY of it back, and have threatened to burn down the neighborhood unless mom and dad buy the goods that all the children were promised. Mom and Dad think all the parents including people with NO children should help pay for this for the good of the neighborhoods. Mom and dad are afraid and ashamed, but adamant that no one is at fault, and besides it is fruitless to even discuss it. What could they have done? Kids will be kids. Who could hold them responsible? These things happen. Let's fix it and move on.

You live in a nearby town. You are just appalled by this behaviour but are confused about what to do. You hear so many different versions of this story on the radio, and so much advice from famous child psychologists to give them what they want, they'll get it anyway. Morality is an outmoded concept and doesn't matter. Be positive and problem-solving.

Mom and Dad have gone to the town's biggest bank and the president of the bank loaned them part of the money. Gossip had been that the former president had been completely aware of the scam, but its hard to say because he always spoke in riddles and claimed to know nothing until well after it happened. The whisper is that the Kids were big depositors and shareholders in his bank.

The bank president has asked your city council and mayor to raise YOUR property and local income taxes immediately to pay back the loan and finance the rest of what it will take to clean this mess up. The idea is that all the children can have what they were promised, and no one has to fight about what to do or give back. The mayor and several leading city council members have endorsed this because it increases their ability to control funds for the township. Neat, clean, simple.

Your taxes will only be going up 900 dollars per year. Some out of state people will also be paying for this, but who cares about them.

Financial advisors on television have said that you might have to pay that much or more in extra homeowner's and automobile insurance if the kids start burning down houses and breaking into cars to get what they want. What do you care how the problem gets solved?

If you do nothing your taxes will be raised and you will pay. What do you think Mom and Dad should do?

In our story Mom and Dad are the Bush and Clinton Administrations and their regulatory agencies. The Kids are the Wall Street banks. The local banker is the Federal Reserve. The mayor and city council are the Congress. Do you find this interesting? Why not email it to a couple friends and see what they think about it.