The much anticipated rebate checks start going out today. In fact, over the next few weeks $110 billion will be sent out to the American public. This week, only electronic deposits will occur with paper checks being sent out later. There seems to be a contingency of people who believe that this is enough to turn the economy positive and avoid a recession. I’m not sure how that will be the case since our employment situation is precarious at best.

“NEW YORK (CNNMoney.com) — Tax rebates are starting to arrive in bank accounts. But many economists doubt that they will keep the economy from recession.

The stimulus package, passed with overwhelming bipartisan support earlier this year, will give rebates to about 130 million Americans, costing the U.S. Treasury more than $110 billion. Married taxpayers earning $150,000 or less will get up to $1200 while single taxpayers earning $75,000 will receive up to $600.

But since the measure passed Congress, there have been growing signs that the U.S. economy has already fallen into recession.”

Of course given the state of the economy and that we are in an election year, this passed with very little hesitation. Yet the impact of this rebate will hardly do anything since our economy is $13.84 trillion dollars strong. The fact that Americans are spending themselves into the ground will not be stymied by $600 or $1,200. It will feel good no doubt but this is only going to add additional fuel to the already present inflation we are seeing.

The main goal of course from the administration was to get people out there spending since 70 percent of our economy is based on consumption. Yet this may turnout to be a harder goal to achieve:

With the rebate being electronically deposited into taxpayers’ accounts as soon as today, area residents said they are leaning toward saving for a rainy day or paying debt rather than making a big purchase.

“I know what the goal is for the stimulus, but I’m more than likely to invest it and try to make more money that way,” said Pinkie Shuler of Winston-Salem.

Trean Ellis of Denton said that she and her husband are putting their stimulus money toward a down payment for a home they are planning to build in Lexington.

“It may end up being a small part of what we need, but every bit helps in this economy with gas prices being the way they are and both of us commuting to work,” Ellis said. “It would be nice to buy a big-screen TV but we’ve got other priorities now.”

The rebate is part of a $168 billion economic-stimulus plan approved by Congress in February. The amount ranges from $300 to $600 for individuals and from $600 to $1,200 for couples, plus $300 for each child.”

People have larger issues on their mind and will probably use the rebate to pay off debt, save for a rainy day (which given our economy is today), and other priorities. In fact, people are already shifting their purchasing habits to daily necessities. Kroger and Wal-mart are gearing up for incentives to bring in rebate ready buyers to their stores:

“If big retailers have their say, every dime of your tax rebate will be spent. Many retailers are offering incentives to trade in rebate checks.

Grocery chains Albertsons and Kroger and department stores Sears and Kmart are offering consumers an extra 10 percent for every $300 gift certificate they buy.

Home Depot is going green, urging customers to stretch their tax rebate dollars by investing in energy-saving products. Some retailers, like Walmart, are even considering a plan to cash tax rebates checks at no charge.”

So they want you to come in and blow your money on things you’ll already be buying. The only question is, will people respond accordingly. Ironically, the timing couldn’t be worse given the summer driving season and practically dollar for dollar that rebate will be consumed by higher fuel costs:

“Gasoline nationally is in an accelerated upswing, having jumped to $3.58 a gallon from $3.50 in just the past week. In some parts of the country, including New York City and the West Coast, gas is already sporting a price tag above $4 a gallon. There was a pray-in at a Chevron station in San Francisco on Friday led by a minister asking God for cheaper gas, and an Arco gas station in San Mateo, Calif., has already raised its price to a sky-high $4.62.

In Manhattan, at a Mobil gas station at York Avenue and East 61st Street, premium gas is now $4.03 a gallon. Two days ago, it was $3.96. Why such a high price? “Blame the people at STOPEC (he meant OPEC) and the oil companies,” an attendant there told me.”

This is too little too late given the current housing debacle which has already erased $2 trillion in equity. Do people really think that this is going to stop people walking away from mortgage obligations in states like California and Florida where homes have dropped from $100,000 to $200,000 in one year? Enjoy the money in your account but make no mistake that this will do nothing to change the landscape of our economic troubles.

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Unless you’ve been living under a rock, you are probably aware of the JP Morgan/Fed orchestrated bailout. The amazing thing about this entire situation is how quickly Bear Stearns went under. In the matter of one year, the once fifth largest investment bank was bought out for a pittance of its once mighty price. Bear Stearns has a long and storied legacy going back to 1923. Bear has lived through numerous recessions and the Great Depression. The company has approximately 14,000 people and as of last November, was generating a net income of $233 million.

Bear even as recently as 2005 to 2007 was listed as “most admired” securities firm according to Forbes magazine. If anything, it seemed like the mighty Bear could do no wrong. That is until the credit crunch hit.In June of 2007 Bear had to come up with over $3 billion to bail out one of its funds that was dabbling in collateralized debt obligations (CDOs). Incredibly these funds were seized at the time by Merril Lynch for $850 million who was only able to get $100 million for them on the auction block. Talk about mark to market. This little hiccup turned out to be the tip of the iceberg as we entered August and the market pummeling credit crunch.

The company had a fabled somewhat legendary status. With Alan “Ace” Greenburg, the mythic chairmen of the board for nearly two decades, the company was a destination for many Wall Street types. But as the market would have it, having way too much leverage in a time when credit is tight and investors are jittery, the investment bank saw a run and in a matter of a week, had lost over 90 percent of its initial market value. It is hard to say what exactly was the catalyst that caused the camel er, I mean the Bear to break its back but this may be a good reason:

“First, as of Nov 30, 2007 Bear Stearns was counterparty to 13 TRILLION in derviatives contracts, as shown in their most recent public 10K Filing with the SEC. (hat tip to jerrbear from PrudentBear for tracking down the reference page. Great catch!).

As of November 30, 2007 and 2006, the Company had notional/contract amounts of approximately $13.40 trillion and $8.74 trillion, respectively, of derivative financial instruments, of which $1.85 trillion and $1.25 trillion, respectively, were listed futures and option contracts…

The Company’s derivatives had a notional weighted average maturity of approximately 4.2 years at November 30, 2007 and 4.1 years at November 30, 2006. The maturities of notional/contract amounts outstanding for derivative financial instruments as of November 30, 2007 were as follows:”

*Hat tip: Jesse’s Café Americain

There is a lot of talk discussing how great of a deal JP Morgan got Bear Stearns for but again, take a look at the counterparty risk that is involved. There is a reason why the Fed has offered up $30 billion in non-recourse loans to JP Morgan to assume the mess that is on the books at Bear Stearns. The irony may be that Bear Stearns may be one of many that have their hands in the counterparty cookie jar. Just like Bear was early in June with its imploding hedge fund from the August crunch, it is quite possible that they are early here with the unwinding of the counterparty market which the Fed knows that it has one and only one shot to save. Once the unwinding and panic sets in this market, there is no putting the genie back into the market.

What Bear Stearns also shows us is how deceitful Wall Street can be to a public that relies on transparency to invest. On the week before the collapse CEO Alan Schwartz had this to say:

Chronology of Events:

Wednesday March 12: “Our balance sheet has not weakened at all,” he said. “We don’t see any pressure on our liquidity.”

“There’s been a lot of volatility in the market, a lot of disruption. That’s causing some administrative pressure, getting trades settled. We’re in constant dialogue with all the major dealers, and I have not been made aware of anybody not taking our credit,” he said

Thursday March 13: “Our balance sheet has not weakened at all,” said Schwartz, noting that Bear’s $17 billion cash position was the same as it had been in November. On Monday, the company posted a similar message on its web site: “The company stated that there is absolutely no truth to the rumors of liquidity problems that circulated today in the market.”

Friday March 14: Bear Stearns drops from a share price of $54.24 to $30.

“JPMorgan, backed by the Federal Reserve, provides an undisclosed amount of emergency financing to Bear Stearns. Bear says its liquidity position had deteriorated dramatically in the previous 24 hours. The stock plunges to close at $30.85. The average price target: $93.62.”

Sunday March 16: “JPMorgan agrees on March 16 to buy Bear for $236 million, or $2 a share, representing just over 1 percent of the firm’s value at its record high close just 14 months earlier. The deal essentially marks the end of Bear’s 85-year run as an independent securities firm. On Monday, March 17, Bear shares close at $4.81 on optimism another buyer may emerge. The average target price: $2.”

The Federal Reserve on an unusual weekend meeting, decided to accelerate the bailout by arranging the meeting and having the negotiations taken care of before world markets opened. The news was announced a few hours before world markets in Japan and Honk Kong opened but did little to relieve the market downturns. Overall global markets ended sessions significantly down. As the Monday session opened, Bear was trading slightly above the $2 target range, around $3 to $4 per share but significantly down from its $30 Friday close.

And so the mighty Bear has fallen. The only question is, will there be others to come or was this an isolated event?

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