Bear Market

Meet Bear Stearns, a Madison Avenue
investment bank worth maybe one-third of a trillion dollars (that’s
trillion, with a Texas T). In mid-March it was about to go down the
tubes. Bear Stearns had been losing the confidence of Wall Street since
last July, when a couple of its hedge funds woke up to find themselves
all but worthless. Since then, the crisis in sub-prime mortgages has
worked its way through the arcane layers of global finance, with the
end result that enough people didn’t believe that mighty Bear could
survive the dawn of trading on St. Patrick’s Day. (And you thought you had a headache that morning.) 

Word was that Bear just didn’t have
enough cash, and if their creditors called them to pay up, they would
have had to declare bankruptcy. If they did, the resulting legal
fallout would entangle so many other entities that the already wobbly
credit markets might fall down flat. Remember that scene in Titanic when the survivors were struggling to swim away from the ship before it finally sank? You get the picture.

Truth be told, no one on Wall Street or
in Washington had enough of a grasp of the new world order of
repackaged securities to make a valid assessment of the Bear Stearns
dilemma. No worries. The Federal Reserve bankers skipped church on
Sunday, March 16, and put together a deal that made people who held JP
Morgan Chase stock quite happy—and people who held Bear Stearns stock,
received Bear Stearns paychecks, or both, quite sad, and even furious. 

The deal allowed JP Morgan to buy Bear
Stearns for $262 million, barely 2 percent of what it was thought to be
worth just weeks earlier. To make things even
sweeter for the JP Morgan folks, the Fed put up $30 billion in
government money to back some of the sketchier paper they were
inheriting. That’s $30 billion, which is, even today, a lot of cash. To
give you some perspective, $30 billion is nearly 30 times what the
residents of Onondaga County have spent on the war in Iraq to date.
(According to the National Priorities Project, county residents have
collectively contributed $1.1 billion to that sorry venture.)

The free marketers in our midst would be
quick to point out that such intervention by the government is not
really in keeping with the values of our economic system. Ever since
balloon mortgages started popping all over the country last year, we
have heard that you can’t bail out people who make bad decisions. But
when it was simply homeowners with mortgage payments they couldn’t
make, the administration preached tough love and laissez faire. 

Both Sen. John McCain and President
George W. Bush were willing to ask the banks to play nice, but as far
as a bailout, the soon-to-be-dispossessed homeowners were on their own.
For the investment house with enough unregulated market power to shut
down a good chunk of the economy, unprecedented measures were extended.
Moral of the story: If you want the government to help you keep your
house, you had best be an investment house.

Now meet the nearly vacant nine, a
collection of decaying rental properties in Syracuse that the federal
government wants to auction off to the highest bidder. The city, backed
by Sens. Hillary Clinton and Charles Schumer, Rep. James Walsh, and
everyone else with a head on their shoulders, objected strenuously. 

It matters not whether the city delayed
in responding to the Department of Housing and Urban Development’s
queries last year—local incompetence does not excuse federal
callousness. Why not just let the free market do its magic? Because,
while these may not be prime real estate at the moment, they are prime
locations. Some of them are gateway locations, strategically placed on
two main corridors exiting downtown: James Street to the north, and
West Onondaga Street to the west. 

As downtown growth crawls toward the
periphery, the condition of these buildings will go a long way toward
determining the health of the surrounding neighborhoods. In short, what
happens with this sale matters to the future state of Syracuse. Nine
apartment houses with a couple hundred units matter a lot in a city
this size. Putting them on the auction block may sound like the free
market thing to do, but our history with developers and landlords
suggests that sometimes a little oversight is not a bad thing.

HUD, which had scheduled the auction for
March 26, postponed it for three weeks. The city wants to see proposals
from potential buyers so that the property goes to the one who makes
the best offer, not just the one with the most cash. While 21 days
isn’t enough time to find a developer and nail down a deal, it may be
enough time for the city to find another way out of the jam. I suggest
that Mayor Matt Driscoll take our hard-earned tax dollars and invest
them in risky hedge funds. Tie that money up in worthless investments,
then run crying—on a Sunday, if possible—that we can’t pay the bills.
That seems to be a good way to draw sympathy, and cold cash, from the
federal government these days.