I want my two dollars.

JP Morgan buying Bear Stearns for $2 a share is just terrifying. It calls into question the valuation of everything in the financial sector. Bear Stearns was a $60 stock on Thursday. It's a $2 stock today. The Fed has chosen once again to defend valuations -- but this time they've put a significant low-ball price out there. They're effectively financing the Bear Stearns deal for JP Morgan.

My gut reaction is this is a windfall deal for JP Morgan as they'll now be a galvanizing symbol of the bailout and their success reflects directly on the Fed from now on. In full disclosure, someone managing one of my accounts bought JP Morgan for me a while ago and I still own it.

The Fed expanded the crap-for-money window from 30 to 90 days and are now accepting any paper deemed "investment grade" -- anything rated above junk is eligible as collateral. Again, this diminishes the value of the currency. Your dollars are now tied to paper just above junk. Congratulations.

There's danger of a run on the banks here as people lose confidence in their institutions. The markets aren't even open yet and I hear speculation of Lehman and Citigroup next in line for meltdown.

War, tax cuts, federal bailout of the banking system. Never in our history have all the spigots been turned on at once without any effort to offset the leakage. We are in uncharted territory and it looks like a savage and untamed land.

The Fed is quickly running out of options and has backed themselves into a corner. This action resolves nothing and fosters confusion. The questions raised are profound: How do they not bail out the next broker? If they don't, what will people think then? Where do they draw the line? How is the Fed making these enormous decisions so quickly and without oversight? Where the hell is congress?

Extended credit is effectively a confidence game -- it's offered if the other party thinks it will be paid back. How does the Fed restore confidence to the markets? I don't think it's by declaring that Bear Stearns is worth two dollars. That drives a belief that things are worth less than they seem. If they're setting a bottom, they're setting it well below current market values.



I leave you with some dialogue from the iconic film Better Off Dead.

JOHNNY
Four weeks. Twenty papers. That's two dollars... plus tip.

LANE
Gee, Johnny, I don't have a dime. Sorry!

JOHNNY
Didn't ask for a dime. Two dollars.

In the microcosm of this scene, you can see Fed policy (papers for money), poor credit conditions (Lane can't pay), and a failure of a creditor (Johnny) to come to terms with reality. Ironically, despite Lane the deadbeat's suicidal nature, it is the paperboy creditor Johnny who dies later in the film. Ok, ok. It's got nothing to do with the Fed. I just wanted to show it because he keeps saying "Two dollars!" over and over again. You're going to hear that phrase a lot today.