From his NYT column…

Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”

Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.

Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.

But the Fed rode to Bear’s rescue anyway, fearing that the collapse of a major investment bank would cause panic in the markets and wreak havoc with the wider economy. Fed officials knew that they were doing a bad thing, but believed that the alternative would be even worse.

As Bear goes, so will go the rest of the financial system. And if history is any guide, the coming taxpayer-financed bailout will end up costing a lot of money.

The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.

If these numbers shock you, they should. But the big bailout is coming. The only question is how well it will be managed.

As I said, the important thing is to bail out the system, not the people who got us into this mess. That means cleaning out the shareholders in failed institutions, making bondholders take a haircut, and canceling the stock options of executives who got rich playing heads I win, tails you lose.

Couldn’t have put it better myself. But will it happen? Don’t hold your breath.

And another thing… The Reagan era savings-and-loan scandal mentioned by Krugman went largely unexposed by the fearless American media. Just as the sub-prime scandal did — until it became unmissable. I went to a fascinating dinner in London about two years ago in which the great Mark Anderson did one of his famous tours d’horizon. He went on and on about the “coming sub-prime crisis” and I began to feel embarrassed because I’d never heard the phrase until that moment. And I’m a pretty assiduous reader of newspapers — American as well as European.

From Robert Peston’s Blog

The Financial Services Report into its supervision of Northern Rock is a catalogue of mistakes, a tragedy of errors rather than a comedy.

The City watchdog admits to inadequate record keeping. Proper notes weren’t taken of important meetings with Rock executives.

There was no rigorous assessment of the serious business risks being run by the Rock, both in the way that the bank was rapidly increasing its mortgage lending and in its financial dependence on selling these mortgages to investors in the form of bonds.

In some ways, it was the riskiest bank in the UK.

But here’s what will shock many.

It was treated by the FSA as though it was the least risky bank in the UK: it received deep assessments of its operations less frequently than most other banks; FSA staff had far fewer meetings with Rock executives than they did with executives at other banks; and unlike what happened at other banks, there was no attempt to force the Rock to reduce the risks it was running.

As the FSA itself says, this was not just a failure of more junior staff. Responsibility for these failings ultimately rests with senior FSA management…

I’ve got a good friend who runs an investment company — and who therefore has had many dealings with the FSA. Long before the Rock fiasco, he told me that the FSA was the most incompetent and arrogant organisation he’d ever dealt with. And yet it had powers of life or death over his business.

And another thing… One of the most disgraceful aspects of the whole story is the way the FSA and its City acolytes tried to frame Mervyn King, the Governor of the Bank of England, for the failure to deal with the errant bank. The whole thing stinks. But I bet nobody in the FSA will fall on his sword.

JPMorgan Chase is to pay a revised $2.1bn (£1.05bn) for Bear Stearns after sweetening the terms of the deal to make it almost impossible for a rival to make a counter offer amid growing concern among other banks over the original $236m transaction…

[Source]

Still, it’s only $10 a share, which is some consolation, given what BS was once ‘worth’. On that subject, incidentally, John Lanchester recently said some pertinent things, viz:

Companies, even huge financial companies like Bear Stearns, have personalities, and the personality of Bear, the fifth-largest US investment bank, was bullish, chest-out, cigar-chomping, macho, and unlovable. In 1998, the hedge fund Long-Term Capital Management – which would better have been named Short Term Crazy Betting – blew up. It had available cash of $500m but had borrowed and leveraged so extensively that it was holding contracts worth an apocalyptic $1.25tn. The president of the Federal Reserve Bank of New York, William McDonough, got together the heads of the big US banks at his offices, and essentially demanded that they rescue LTCM.

This was a moment for the fat cats and Wall Street oligarchs to demonstrate their public-spiritedness by risking their own money to rescue LTCM from its own mistakes, and in the process avert the risk of a global meltdown. The first banker to speak was James Cayne the (literally) cigar-chomping head of Bear Stearns. He was in a good position to know the gory details about LTCM’s derivative holdings, because Bear Stearns cleared LTCM’s trades. Cayne said no. He refused to help LTCM.

The other bankers went berserk. But Cayne didn’t budge, and in the process uttered a magnificently menacing line: “Don’t go alphabetically if you want this to work.” So the other banks bailed LTCM out, and did not love Bear Stearns for not doing so, and at least one person in the meeting openly vowed revenge…

Intriguing video exchange about Obama’s character between Jacob Weisberg of Slate and David Frum of the National Review. Frum’s opinion is that Obama is “either going to be Lincoln or he’s going to be a disaster”. He also thinks Obama is the most inward-looking candidate since Richard Nixon!

Interesting piece by Mark WIlliams in Technology Review…

To prevent rain over the roofless 91,000-seat Olympic stadium that Beijing natives have nicknamed the Bird’s Nest, the city’s branch of the national Weather Modification Office–itself a department of the larger China Meteorological Administration–has prepared a three-stage program for the 2008 Olympics this August.

First, Beijing’s Weather Modification Office will track the region’s weather via satellites, planes, radar, and an IBM p575 supercomputer, purchased from Big Blue last year, that executes 9.8 trillion floating point operations per second. It models an area of 44,000 square kilometers (17,000 square miles) accurately enough to generate hourly forecasts for each kilometer.

Then, using their two aircraft and an array of twenty artillery and rocket-launch sites around Beijing, the city’s weather engineers will shoot and spray silver iodide and dry ice into incoming clouds that are still far enough away that their rain can be flushed out before they reach the stadium.

Finally, any rain-heavy clouds that near the Bird’s Nest will be seeded with chemicals to shrink droplets so that rain won’t fall until those clouds have passed over. Zhang Qian, head of Beijing’s Weather Modification Office, explains, “We use a coolant made from liquid nitrogen to increase the number of droplets while decreasing their average size. As a result, the smaller droplets are less likely to fall, and precipitation can be reduced.” August is part of Northeast Asia’s rainy season; chances of precipitation over Beijing on any day that month will approach 50 percent. Still, while tests with clouds bearing heavy rain loads haven’t always been successful, Qian claims that “the results with light rain have been satisfactory.”

Remind me again — what follows hubris…?