The Bear Bailout

I’ve been wondering how much money the Bear Stearns bailout will really cost the Fed. Commenters are throwing around the 30 million dollar figure, but of course that represents an absolute worst case. Under the terms of the agreement with JP Morgan, the investment bank is on the hook for the first billion dollars in losses from liquidating the firm, while the Fed is responsible for the rest.

This Bloomberg article offers some useful information on the subject. They quote Joe Mason, a Drexel University professor who researches banking crises, who observes that on average creditors only recover 40 percent when liquidating insolvent banks. So the losses to the Fed could plausibly be potentially quite large.

Generalized Hyperbolic Distributions

I came across short paper by Stefan Jaschke that describes different modeling choices for stock returns (which famously have fat tails). The paper suggests generalized hyperbolic distributions as a possibility.

New Economic Geography

The New Economic Geography is a family of theoretical models that try to explain why modern economies naturally produce large cities or metropolitan regions. I came across this survey paper by Ottaviano and Thisse which introduces the subject.

Bear Stearns in Trouble

When the New York Fed organized a bailout by Wall Street of Long Term Capital Management, Bear Stearns notoriously refused to cooperate. Now it’s their turn, as the Fed and J.P. Morgan cooperate to prevent a complete collapse of the broker.